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Foreign EV makers fret over China's uncertain playing field

Beijing's diktats give domestic makers edge in Chinese, emerging markets with low-cost cars

Workers assemble electric cars in the eastern Chinese city of Weifang, Shandong Province, in March 2016.   © AP

TOKYO -- When hundreds of auto industry officials gathered here last week for a conference hosted by research firm IHS Markit, many had one question in mind: what will happen to their access to the Chinese market following Beijing's decision to mandate an output quota for electric vehicles?

Japanese automakers have already seen a steady decline in their market share in China, from 21.3% in 2009 to 15.6% in 2016, losing ground to local manufacturers. Foreign carmakers would be hard-pressed to fight in the local EV market, where Chinese manufacturers can produce much more cheaply.

IHS analysts tried to calm the nerves of the conference participants, stressing that the new requirement is not as drastic as it first appears, at least through 2019. Still, there is a risk that the rules will be significantly tightened after 2020, pushing foreign automakers further into a corner where they will only be able to produce vehicles in China through joint ventures with Chinese partners.

They will look to be able to guide their indigenous makers to a position of -- not necessarily primacy, but being very competitive

Mark Fulthorpe, IHS Markit

The policy could result in more EV technologies being transferred from foreign to Chinese companies. 

"They [Beijing] will be able to guide their indigenous makers to a position of -- not necessarily primacy, but being very competitive," said Mark Fulthorpe, an IHS analyst.

Under the plan unveiled last month, all automakers will need to ensure that electric, hybrid and fuel-cell models constitute 10% of their sales volume in 2019, or buy credits to cover the shortfall. One caveat is that EVs with a longer driving range are worth more than one credit. For instance, an EV with a range over 350km earns five times as many credits. That means even if these vehicles make up only 2% of sales, the maker has achieved the 10% quota.

Still, the challenge is daunting for foreign automakers. "The pricing will be defined by the one Chinese [automakers] are trying in the market, which is pretty low," said Reinhard Schorsch, another IHS analyst.

Many foreign carmakers have chosen to respond to the new requirement by forming partnerships with Chinese manufacturers. The Renault-Nissan alliance has teamed up with Dongfeng Motor Group to produce compact electric cars, while Ford Motor of the U.S. is pursuing an EV joint venture with Anhui Zotye Automobile.

Wider horizons

Chinese automakers may still lag behind multinational rivals in cutting-edge technologies, such as autonomous driving. But they have perfected low-cost production skills and are ready to compete in overseas markets, especially in emerging economies like Thailand, Indonesia and India -- countries where Japanese brands have traditionally enjoyed a dominant position.

IHS Markit says the next sales cycle of automobiles will be characterized by more robust growth in emerging markets, and limited growth in mature ones, following the the end of a recovery cycle that began around the time of the 2008 financial crisis. Chinese manufacturers are primed for such an opportunity.

"Currently what they plan to do is to increase their market share in China, but that's not their destination," Joyce Wang, a Shanghai-based IHS analyst, said of Chinese automakers. "They want to copy it in other markets."

In May, Zhejiang Geely Holding Group said it agreed to buy a 49.9% stake in Malaysian automaker Proton Holdings, and 51% of British sports-car brand Lotus. Proton could serve as a gateway for Geely to enter the rapidly growing Southeast Asian market, where it could produce and export tariff-free within the regional economic bloc. In 2010, Geely bought struggling Swedish automaker Volvo Cars from Ford.

Other Chinese manufacturers are following Geely's lead. In 2015, China National Chemical acquired Italian tire maker Pirelli. Autoparts supplier Ningbo Joyson Electronic took over Key Safety Systems of the U.S. in 2016 and through it Japanese air bag maker Takata this year. In August, Great Wall Motor said it is considering a possible bid for Fiat Chrysler's Jeep brand.

The Chinese companies' strategies are twofold: winning over cost-sensitive consumers in emerging markets, while moving up the value ladder to higher-profit-margin segments through the acquisition of established Western manufacturers.

For instance, China's largest automaker SAIC Motor said in June it would start building cars in India, even as General Motors -- a joint venture partner of SAIC -- said it planned to pull out of there by the end of the year to focus on its mainstay U.S. and Chinese markets.

India's passenger car market is currently dominated by Maruti Suzuki India, which commands 47% market share. Other global automakers, such as Toyota Motor of Japan and Germany's BMW, have tried to break in, with little success. Big domestic names include Tata Motors and Mahindra & Mahindra.

"There is an attraction for people to try to get into that market and challenge Maruti Suzuki for some of its share," said Fulthorpe. "Companies coming from a lower cost base may be able to better achieve that."

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