Tuesday, 19 June 2018

China market in control as industry enters new era


BEIJING — When the head of China’s largest ride-hailing company, Didi Chuxing, took the stage in April ahead of the Beijing auto show, the event unfolded as a warning shot to the rest of the world.

CEO Cheng Wei said the company was bringing together 31 eager automotive suitors, including global heavyweights Toyota, Volkswagen and the Renault-Nissan-Mitsubishi Alliance, to tackle one of the hottest issues: developing cheap, electrified vehicles and new mobility technologies for the world’s biggest auto market.

The scale would be mammoth, fathomable only in the context of China. Didi, he said, would bring 1 million electric vehicles into its ride-hailing network by 2020 and some 10 million by 2028.

Cheng, all of 35 years old, then perfectly captured the zeitgeist sweeping the Middle Kingdom.

“China could play a pivotal role in transforming the existing automotive and transportation structure that has been in place for over 100 years,” Cheng said. Didi, he promised, would help China’s auto industry leapfrog “from a global leader in scale to a global leader in innovation.”

China has been the world’s biggest auto market since 2009, when it eclipsed the U.S. But only recently has it reached a long-anticipated — and in some quarters long-feared — tipping point. Instead of being a passive center of sales, profits and production, China is taking the wheel as a true driver of the global industry in innovation, development, investment and more.

The trajectory fits a global pattern. The auto industry was born in Europe more than a century ago, dominated by Detroit after World War II and then turned on its head by the Japanese at the end of the 20th century. Now, it is China’s turn to leave its stamp.

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“The tipping point has already happened,” said Bill Russo, CEO of Shanghai consultancy Automobility and a former China executive at Chrysler and auto electronics supplier Harman. “China won. They understand it’s not just about who is going to lead development of the car but who is going to shape future mobility. It’s a new era.”

How to make sense of this historic crossroads?

The Chinese juggernaut can be viewed through several lenses: customer, exporter, rival, partner, innovator. And now, as the industry’s global dictator.

As Didi’s draw of international partners shows, foreign carmakers see China’s massive market as a pool of almost unlimited sales. Its sales growth has cooled from the breakneck double digits of recent years. But domestic demand is up a healthy 4.5 percent this year through April, while other major markets, such as the U.S., continue to plateau.

Light-vehicle sales in China will climb 2.1 percent to 28.5 million vehicles this year, IHS Markit forecasts. And domestic demand will keep soaring to some 32 million in 2022, IHS predicts.

Volume in North America, by comparison, is expected to stagnate around 20 million over that period, while Western European sales flatline at around 16 million.

China has plenty of room to expand. Car ownership in the world’s biggest market was only about 121 vehicles per 1,000 people in 2015 and is forecast to reach only 200 by 2021, according to IHS Markit. That is still far below the 814 vehicles per 1,000 people in the U.S.

China is the biggest market for several manufacturers, including Volkswagen and General Motors. Others, including Nissan, expect China to be their biggest soon. For Volkswagen Group, China alone accounted for 40 percent of global sales in 2017.

Because of that, Chinese customers are wielding their influence on the global stage.

Chinese tastes and trends increasingly will flavor models sold worldwide. More vehicles will be developed for China first before being sold in the United States and other markets.

Bigger back seats were an early outgrowth of tailoring cars to Chinese tastes.

“We are listening more and more to the Chinese customers. The power of the Chinese consumers has definitely increased.”
Hakan Samuelsson, Volvo CEO

But China is a well of other ideas big and small. The integrated tissue box holder in the center console of the Volvo XC40 crossover? That was conceived to appeal to Chinese drivers, who like to have their tissue box constantly within easy reach, not sliding around on the floor or stuffed in a door pocket. Now the rest of the world gets it, too.

“We are listening more and more to the Chinese customers,” Volvo CEO Hakan Samuelsson said. “The power of the Chinese consumers has definitely increased.”

China will increasingly command outlay of r&d and production resources, often at the expense of other markets. Consider the Acura CDX and Honda Avancier, two popular crossovers designed for and sold only in China by Honda Motor Co. Engineering such vehicles saps resources that could have been channeled into building a better Accord or Pilot.

“We overestimated the value of the American DNA of Jeep onto the Chinese market. We need to retune that DNA to make sure that it becomes absolutely relevant to the Chinese market.”
Sergio Marchionne, FCA CEO

Jeep, the quintessential American brand, sometimes gets lost in translation here.

“We overestimated the value of the American DNA of Jeep onto the Chinese market,” Fiat Chrysler Automobiles CEO Sergio Marchionne said in an April conference call. “We need to retune that DNA to make sure that it becomes absolutely relevant to the Chinese market.”

Jeep’s solution: The Grand Commander, a China-built three-row SUV made for China. “That mindset will create unique solutions that emerge in China,” Russo said.

Jeep Commander

It is natural that China, with annual production capacity exceeding 31 million vehicles, would start targeting foreign markets. The flow of Chinese exports has begun — and not just to developing countries in Africa or South America, where Chinese brands gained an early toehold.

Names to know

The biggest China players you’ve (probably) never heard of

  • EV STARTUPS
  • Byton
  • Nio
  • WM Motor
  • Xpeng
  • Singulato Motors
  • CHINA’S BIG TECH TRIUMVIRATE
  • Baidu
  • Tencent
  • Alibaba
  • NEW MOBILITY
  • Contemporary Amperex Technology (batteries)
  • Horizon Robotics (autonomous-driving microchips)
  • SenseTime (artificial intelligence)
  • Pony.ai (autonomous driving and artificial intelligence)
  • Didi Chuxing (ride-hailing)

Volvo, the Swedish automaker owned by China’s Zhejiang Geely Holding Group, began sending China-built S60 sedans to the U.S. in 2015, making it the first Western automaker to export premium vehicles from China. It began shipping the S90 flagship sedan to Europe in 2017.

GM entered export mode in 2016, shipping its Buick Envision compact crossover to the U.S. from China. Ford plans to import the Focus Active wagon from China starting in 2019.

Volkswagen this year said it also will start exporting vehicles manufactured in China, first to the Philippines and then to other Southeast Asian markets.

Those moves could pave the way for Chinese brands.

Guangzhou Automobile Group Co., a middling Chinese player by volume that had global sales climb 30 percent to 510,000 vehicles last year, wants to start selling a seven-passenger crossover called the GS8 in the U.S. in late 2019. GAC is recruiting American dealers.

“It’s different than just 10 years ago,” said James Chao, managing director of IHS Markit in Shanghai. “The local companies are just much, much better.”

Americans seem unperturbed by the notion of buying China-made vehicles. Fewer than a third of U.S. consumers say their decision to buy would be affected by a vehicle being manufactured in China, according to a May study by Autolist.com.

Americans could be driving away in 305,000 China-made vehicles a year by 2020, according to one forecast by IHS Markit. That is, of course, if tariff threats by President Donald Trump don’t make Chinese imports a losing proposition.

China’s potential as an export hub and incubator for brands with global ambition means the country’s auto industry is emerging as a rival to the automotive old guard.

China’s communist government has protected the local industry with tariffs and Byzantine requirements for foreign automakers to enter joint ventures with local competitors, although Chinese President Xi Jinping in April announced a planned rollback of the foreign ownership limits and in May the Finance Ministry said it would ease tariffs on imported vehicles.

Still, Beijing hardly hides its intentions. Exhibit A is the Made in China 2025 campaign. It targets acquiring technological know-how and establishing global leadership in sectors such as EVs, artificial intelligence, robotics, autonomous vehicles, quantum computing and advanced manufacturing.

Names such as Didi or Cheng Wei may draw blank stares from most Americans, just as Subaru or Soichiro Honda did in the 1960s. But that is likely to change as China goes global.

What was the world’s top-selling electric car in 2017?
Not the Tesla Model S or Nissan Leaf. It was the BAIC EC180, a utilitarian hatchback runabout available only in China. Much of China’s auto industry may be unfamiliar to the rest of the world, but its influence has become too big to ignore.

For now, though, China’s numerous domestic brands mostly lack the quality, styling and technology needed to compete against behemoths such as GM, VW or Toyota.

Yale Zhang, managing director of Automotive Foresight in Shanghai, notes that even in their home market, Chinese brands command just 40 percent of total sales.

“It’s too early to say that Chinese brands will conquer the world,” Zhang said. “It’s pretty obvious the local players are still trying to catch up.”

Yet, domestic brands have been chipping away at the market share of international marques, as the domestics’ vehicles become increasingly sophisticated.

Tension about their trajectory is on full display in the Trump administration’s trade talks with China. The U.S. launched a national-security investigation into car and truck imports that could lead to new U.S. tariffs. They ostensibly target automakers already importing.

But U.S. officials also may see tariffs as a way to nip a future wave of China imports in the bud.

“Nothing less than the future of tens of millions of American jobs is at stake,” U.S. Trade Representative Robert Lighthizer said in May as Beijing and Washington threatened trade war.

Headlong competition with the West isn’t China’s only road to expansion. Increasingly, the Chinese take another, less confrontational approach: If you can’t beat them, buy them.

China’s deep-pocketed auto companies are extending lifelines to dying international brands.

Nothing exemplifies this better than Geely, the automotive upstart led by Li Shufu. A farmer’s son turned self-made billionaire, Li transformed Geely from a lowly maker of aluminum plates into China’s best shot at a global automaker.

Li didn’t get there by selling lots of Geely’s Emgrand sedans, although they are popular in China. Instead, he embarked on a transcontinental buying binge.

It began in 2010, when Geely picked up Volvo from a troubled Ford Motor Co. racing to raise cash, and then snowballed. Geely acquired stakes in the British maker of London’s black cabs, the Malaysian carmaker Proton and the British sports car brand Lotus. Last year, Geely even bought a Massachusetts company called Terrafugia that’s developing — no joke — flying cars.

And Li is aiming higher still. In February, it was revealed that he had quietly accumulated a 9.7 percent stake worth some $9 billion in Mercedes parent Daimler, the grande dame of German luxury that traces its heritage to Karl Benz, one of the auto industry’s founders.

Geely’s international reach is being felt stateside, where the company shelled out $500 million to build Volvo’s first U.S. assembly plant. The South Carolina factory, to open this year, is to employ 2,000 people and churn out 100,000 vehicles annually.

Also new is Lynk & CO, a Volvo sibling brand formed by Geely.

Inspired by mobility trends taking shape in China, Lynk & CO intends to shake up the traditional retail and ownership model with a vehicle subscription plan, no-haggle pricing, online shopping and software that makes car-sharing easier.

“Collaboration with Volvo will make Lynk & CO probably the most realistic China brand to become a really global brand,” Volvo’s Samuelsson said in April.

The partner model is perhaps even more pronounced in the supplier sector.

Flush with cash and prodded by Beijing to acquire top-flight technology, Chinese suppliers are swooping in to partner with and, in many cases, revitalize stressed foreign parts makers.

The most high-profile move was Ningbo Joyson Electronic Corp.’s acquisition of Key Safety Systems, of suburban Detroit. Ningbo Joyson then financed Key Safety Systems’ $1.6 billion buyout of troubled Japanese supplier Takata Corp., whose faulty airbag inflators triggered the auto industry’s largest recall and threw Takata into bankruptcy. Key Safety Systems completed the Takata deal in April.

Among other little-known movers and shakers is Fuyao Glass Industry Group Co. It has 65 percent of the auto glass market in China and is rapidly expanding in the U.S. It invested some $700 million to reopen a former GM plant in Moraine, Ohio, and hire some 2,500 people. It later said it would invest $70 million to transform a Michigan blind and wallpaper factory into an automotive glass plant and regional r&d center.

And there is Jiangnan Mold & Plastic Technology Corp., which bills itself as China’s leading exterior trim maker with capacity to make 3 million bumpers a year. It opened a plant in South Carolina last year to supply BMW’s assembly plant there.

China’s flood of outward investment can help keep lights on and people employed worldwide.

China is getting plenty of investment at home as well. No longer a mere knockoff artist, it is pioneering global trends in several fields, from low-cost EVs and next-generation batteries to online retailing, big data management, ride-hailing and other new-mobility models.

That transformation is being spearheaded by China’s burgeoning high-tech industry as it rushes into the automotive sector.

E-commerce colossus Alibaba Group, the Amazon of China; Baidu, China’s Google; and Tencent, China’s Facebook, form the country’s technology triumvirate.

“In China, there is very close collaboration between technology companies and automakers. I think that is very new,” said Zhou Lei, an automotive consultant at Deloitte Tohmatsu Consulting. “These cars are totally different from traditional cars. They aren’t just EVs. They are more personalized with human-machine interface and are very software heavy.”

Guangzhou Automobile Group Co. wants to sell its GS8 crossover, shown at this month’s Chongqing auto show, in the U.S.

Alibaba is pioneering new retail models such as the “car vending machine” it opened with Ford this year. It uses facial-recognition software to dispense cars for three-day test drives without a salesperson in sight. It also is the creator of the AliOS onboard operating system that foreign executives say tops Apple CarPlay or Android Auto.

Baidu is pioneering autonomous driving. Its self-driving platform is called Apollo, perhaps in a not-so-subtle nod to the NASA moonshot program. Apollo partners include Bosch, Continental, Daimler, Ford and Nvidia.

Tencent, meanwhile, is an investor in electric driving, with stakes in Nio and Tesla.

“I do see China as the front-runner,” Johann Jungwirth, chief digital officer for Volkswagen Group, said on the eve of the Beijing auto show. VW opened an r&d outpost this year in Beijing called Future Center Asia to soak up the latest trends and navigate China’s startup culture.

The latest sign of China ambitions: plans for a cutting-edge, high-tech “smart city” built from scratch some 60 miles southwest of Beijing and populated by self-driving private cars.

Baidu has latched onto the city, the Xiongan New Area, as a real-world lab for testing big data, artificial intelligence, autonomous driving and connectivity in its cars. “We hope to make Xiongan a new model for the world’s future cities,” Baidu CEO Robin Li said.

That China’s government would even venture to break ground on such a metropolis and call it a “thousand-year project” speaks to the sheer force of will driving the country’s rapid change.

China’s communist leaders — epitomized by its president, Xi, who this year threw off term limits so he could be paramount leader for life — rule by fiat, virtually unchallenged.

The result is bold, ambitious projects unlikely to materialize in a free market.

Look no further than China’s drive to become the leader in EVs.

Beijing wants annual production of so-called new-energy vehicles to reach 2 million by 2022. New-energy vehicles include electric cars, plug-in hybrids and green alternatives such as fuel cell vehicles.

“I do see China as the front-runner.”
Johann Jungwirth, chief digital officer of Volkswagen Group, opening Future Center Asia, an r&d outpost in Beijing intended to soak up the latest trends and navigate China’s startup culture.

China is forcing the industry to follow a California-style carbon trade program that kicks in next year.

It requires automakers to earn 10 carbon credits for every 100 vehicles they produce annually in 2019. The required carbon credits for the same level of output will rise to 12 in 2020.

Under the program, a plug-in hybrid qualifies for two carbon credits. EVs are allotted to two to five carbon credits depending on their ranges — the longer the range, the more carbon credits an EV can earn.

Backing the push with generous subsidies and other gimmicks to spur EV sales — such as special allowances for limited license plate registrations in big cities — China is dictating a de facto global standard. Global carmakers that were once EV skeptics are now racing to roll out waves of the cars. And not only in China, but in other markets as well to build scale.

“Without the regulatory framework, China’s influence wouldn’t be as obvious,” said IHS Markit’s Chao. “It forces overseas automakers to either start or accelerate EV development.”

Volkswagen brand alone says it expects to beat an internal target of selling 1 million EVs worldwide in 2025, thanks largely to robust demand in China.

VW Group as a whole wants to sell 3 million EVs a year by then.

Byton

Even EV foot-dragger Toyota, long wedded to its conventional hybrid technology, sees the writing on the wall. Toyota now plans 10 new EVs worldwide by 2020, with the first landing in China next year on the car company’s road to selling nearly 1 million EVs a year in 2030.

At home, Beijing’s rules have triggered a gold rush of EV startups.

Hopefuls such as Nio, Byton, Singulato Motors, Xiaopeng Motors (commonly known as Xpeng) and Weltmeister (also known as WM Motor) are mostly unknown overseas. But each wants to be the next Tesla. And old-guard Chinese automakers are upping their games, too.

What was the world’s top-selling electric car last year? Not the Tesla Model S or Nissan Leaf.

It was the BAIC EC180, a utilitarian hatchback runabout available only in China. State-owned Beijing Automotive Industry Holding Co. sold 72,191 of them, according to industry analytics firm Focus2Move.com. The EC180 helped make BAIC the world’s No. 3 EV seller in the first quarter of 2018. The company fell just behind Renault-Nissan-Mitsubishi and Tesla but booked much faster growth. Its sales more than doubled to 26,409 vehicles, according to JATO.

The government in China is opaque and authoritarian, a risky combination for anyone wanting to do business there. The high-powered mandarins in Beijing hold the keys to everything from joint ventures to tariffs. And this also dictates how international players navigate the field.

Other top pressure points have long been China’s 50 percent ownership cap for foreign carmakers in local joint ventures and the country’s 25 percent duty on imported cars

“Does that sound like free or fair trade,” Trump complained about the policies in an April Twitter missive. “No, it sounds like STUPID TRADE — going on for years!”

In the interim, China has announced it will start rolling back these roadblocks.

Beijing will drop the joint venture requirement this year for enterprises making new-energy vehicles. It will then be phased out for commercial vehicles in 2020 and for passenger vehicles in 2022.

Meanwhile, China has cut the 25 percent tariff on imported cars to 15 percent, sending foreign brands into a scramble to slash sticker prices.

Even these recent decisions show how China is channeling change.

Douglas A. Bolduc and Yang Jian contributed to this report.



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