| Electric Vehicle Market

China automotive market: Real openness or concealed protectionism?

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A look at China's strong will to become the world’s leader in the new energy vehicles (NEV) market through cycles of policies and the implications of it for foreign manufacturers. Big car manufacturers may well have claimed victory when China’s Government finally shook its domestic market restrictions – but it’s a victory tainted by some important setbacks. The Middle Kingdom is showing real signs of openness, having relaxed regulations of over 20 years’ standing. However, the overall situation is less simple than it appears, and investors should approach this new development with healthy scepticism.

A few weeks back President Xi confirmed a reduction on car import tariffs from 25% to just 15%, which while still being higher than those in the US and EU (respectively 2.5 and 10 percent), represents an important signal toward greater openness. More importantly, China’s state planner is finally abrogating the 50% ownership limit in joint-ventures for automakers entering the Chinese market. This policy would come into effect in the internal combustion engine (ICE) segment by 2022, by 2020 for commercial vehicles and for EVs as soon as this year, probably along with the 2018 revision of the Catalogue of Industries for Guiding Foreign Investment (外商投资产业指导目录). Some say that this decision should ease the disputes on trade with the US and the tensions with president Trump threatening higher import tariffs on Chinese goods. The hypothesis though does seem too weak for such a drastic change, and Chinese officials publicly denied it.

bmw electric car

So, is China deliberately forcing competition on its own companies or do they still want to dominate their market?

The answer lies in the middle. Removing the ownership cap proves that China has finally enough confidence in its own champions (helped by national and local incentives), but the process has been long and complicated.

It was back in 2009 that China became the world’s largest car market (Ministry of Commerce of The People’s Republic of China 2010). The same year it began introducing policies to reform the automotive industry. Its strategy favouring the adoption of NEVs was called ‘Ten Cities Thousand Vehicles’ (十城千辆). The program was intended to encourage technological innovation and competition. It ended up increasing the protection of local companies and technologies that caused more fragmentation and provinces incompatibility.

An updated version of the policy was implemented in 2013. In 2009, the focus was mainly on public transportation, this time instead the private sector was involved right from the start. The regulation covered battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV), and fuel cell electric vehicles (FCEV). Hybrid electric vehicles (HEV) though were excluded from the subsidy eligibility, even though during the first policy’s period they were the most successful among customers.

Beyond China’s plan to boost mainly purely electric cars sales, this trend highlights an important fact. The ability to create new markets is linked to consumers' preferences. Their choices have strong implications for environmental policies and local and foreign automakers. If tastes are overlooked it is difficult to coherently evaluate the outcomes of new regulations. SUVs diffusion is a good example: they accounted for 40% of car sales in 2017 despite their lower efficiency in terms of consumption and emissions. How to offset these disadvantages in favour of environmental-friendly passenger cars, is an important factor for Chinese decision-makers.

But this isn’t the only challenge. The local governments’ strong independence that not only created a double layer of policies but spurs conflicts between firms: the result is today’s over 100 brands licensed to produce cars. Thus, China is aiming at a market consolidation, which involves two main factors. One is the rising standard in quality requirements by Chinese consumers, and secondly the threat of phasing out the incentives and rebates by 2020 introducing also a production quota for NEV.

ev plug

So, what does all this mean for foreign car manufacturers?

Except for the joint-venture, the only other option for foreign carmakers was the Foreign-invested Partnership introduced in 2010 as a more flexible way for foreigners to enter the market and for Chinese brands to seize technological and managerial capabilities rather than capital.

On January 7th, 2017 the Chinese government rolled out a policy that would have allegedly forced foreign manufacturers to demonstrate the capability to cover the whole production process of EVs. Many carmakers concerned about the idea of being forced to hand proprietary technology to Chinese firms complained saying that this policy breached WTO regulations.An official criticism of the EU

Chamber of Commerce in Beijing was filed as well, forcing Chinese officials to clarify that no technology transfer was mandatory. 

The new possibilities granted by the opening of Chinese domestic industry instead will allow more freedom of strategic approach to the market. Tesla, which has been importing cars in China and in 2017 negotiated with Shanghai over the possibility of establishing a wholly-owned industrial plant would benefit the most from it. They did not want to transfer their knowledge to a Chinese partner through a joint venture with the risk of losing their competitive edge.

It might strike as surprising then that many traditional car manufacturers from Europe, Japan, and the US confirmed very quickly their will to maintain their joint ventures, even though the higher industry flexibility was surely welcomed.

First, even for huge firms such as VW, BMW, Daimler, Toyota, Ford, and GM, it would likely be very expensive to ditch their existing agreements. Secondly, changing the ownership balance of these well-established partnerships, could hinder profits, create conflicts, and even incur retaliation with state-owned manufacturers involved (and local governments that back them). These factors have given Chinese decision-makers enough confidence in the fact that foreign automakers are already too dependent on their local partners. So, despite the initial pressure that local firms will face, they now appear to have enough knowledge and resources to adapt and put up with a strong competition.

mercedes ev concept
Finally, there is the matter of battery packs, the most expensive component of EVs, and the stage where most of the technological competition is fought. Despite having fewer media coverage, some protectionist measures could strongly influence foreign automakers' strategy and competition with the local ones. The Ministry of Industry and Information Technology (MIIT) published a list of EV battery manufacturers whose supplies would make a car model eligible for subsidies. For over a year all foreign companies were excluded. This created a big case with the Korean LG Chem and Samsung SDI that were forced to either close their plants or rely on export, to the advantage of Chinese major players CATL and BYD. If this regulation is maintained, in the long run, it would force foreign manufacturers to rely on Chinese firms for the supply of this expensive component (VW and Daimler already signed agreements with CATL).

Despite some conciliatory signals from China, foreign automakers' position remains far from simple and any strategic choices will still be forced to a certain extent. From China’s perspective, the push toward opening and attracting stronger competition for the sake of faster progress is real, but it must not be mistaken for unconditioned control relaxation.

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