China a lifeline for EV makers

Automotive News, March 14, 2016

New-energy push bolsters investment

by Alysha Webb

In 2013, Mike McQuary, CEO of Wheego Electric Cars, was in a bind. The maker of small electric vehicles needed expansion funds.

But with high-profile electrified vehicle makers like Fisker and Coda struggling, the appetite in the U.S. for investing in electrified vehicle makers was slight.

Since he was visiting China regularly to work with suppliers, McQuary made an appointment with GSR Ventures, a venture capital company based in Beijing. It was a good move. GSR now helps fund Wheego.

“They have a long-term view of the new-energy sector and EVs in particular,” McQuary says of his Chinese investor.

Despite early optimism in the U.S., the market for EVs and the technology that goes into them never has really taken off. In 2015, U.S. sales of plug-in hybrids and EVs actually dropped 5.2 percent to 116,099 units, according to Inside EVs.

Government support for the sector has remained tepid. That has left companies that bet on steady growth in demand for electrified vehicles struggling to survive.

In China, however, the government remains committed to growing plug-in hybrid and EV production and sales. That has given Chinese investors and Chinese companies the confidence to sink millions of dollars into U.S. companies with electrification technology.

China a lifeline for EV makers Mail, Today at 10.37.31 AM

FDG Electric Vehicles, a Chinese company, built a 2.6 million-square-foot plant in China to produce medium-duty electric vans through its joint venture with Smith Electric Vehicles. The JV, called Prevok, plans to launch the vans in the U.S. this year.

Photo credit: PREVOK PHOTOS

Focus on China
Often, Chinese investors want to focus on the China market.

GSR was “happy to invest in us as long as we turned our eyes to China,” McQuary says.

Though it has dealers and sales in the U.S., the Atlanta-based company now focuses on selling its small EVs — used by municipal governments, at airports and as delivery vehicles — in China.

He can’t discuss sales volume or where the vehicles are manufactured, McQuary says. But the company is still in business, which it might not have been without the Chinese investment.

“China seemed like a much bigger chance for Wheego to be a big success,” he says. “The subsidies they offer over there, and the government support and pressure for EVs to be successful, really trumps what they are doing in the U.S.”

Smith Electric Vehicles also found a savior in China. The Kansas City, Mo.-based company manufactures medium-duty, commercial EVs. It sold around 800 EVs in the United States from 2010 to 2014 to customers including DHL and Coca-Cola, but it couldn’t make money at such low volumes.

It needed cash and a bigger market so it could scale up. That came from Hong Kong-listed FDG Electric Vehicles, a Chinese company with two EV manufacturing plants in China as well as battery production and r&d operations. Smith, whose electric vans have logged millions of miles on U.S. roads, could provide added EV manufacturing expertise.

The Chinese company “had the resources, the money, the engineers [and] the government support, but they had no practical working knowledge” of how to produce an EV, says Bryan Hansel, former CEO of Smith.

China-U.S. joint venture
In 2014, FDG invested some $20 million directly in Smith, says Hansel. Then in May 2015, it invested another $15 million to form a joint venture, named Prevok. Hansel is Prevok’s CEO.

The JV is producing a jointly designed, medium-duty electric van at a 2.6 million-square-foot plant in the east China high-tech hub of Hangzhou. Prevok plans to launch the van in the U.S. this year.

It will be imported initially, moving to local production as volume increases, Hansel says. Demand eventually will be global, he predicts.

Smith likely would not have had the luxury of such an undertaking if it worked with U.S. investors, Hansel says. With FDG, “they said, “Get started guys, and have fun.'”

The Chinese government’s consistent financial support and policy push for development and sale of plug-in EVs underpins Chinese investors’ longer-term view.

China has declared that it will have 5 million “new-energy” vehicles — a category including battery-powered EVs, plug-in hybrids and hydrogen fuel cell EVs — on the road by 2020. In practice, the recent focus has been on battery-powered EVs.

“In China, I went from a period of no interest to one of a lot of interest.”KY Chan
CEO, Protean Electric

China’s central and local governments have combined to offer consumers subsidies that can surpass the equivalent of $16,000 per vehicle.

That is more than half the price of the best-selling plug-in hybrid EV in China, the BYD Qin PHEV, which starts at the equivalent of $31,192. The best-selling pure EV in China, the Kandi Panda, costs $23,139, says Yale Zhang, managing director of consultancy Automotive Foresight in Shanghai.

In the U.S., federal subsidies top off at $7,500. Some states offer additional subsidies.

The Chinese government’s largesse is not bottomless, however. Subsides for electric passenger vehicle purchases are scheduled to decrease, ending in 2021.

And despite subsidies, Chinese drivers have not enthusiastically embraced EVs. The lack of charging stations is one reason.

Sales of EVs did surge in 2015, however, more than quadrupling to 331,092 vehicles.

The growth in sales was largely due to local government purchases, says Zhang.

The central government in Beijing ordered Chinese cities to meet new-energy vehicle purchase targets, he says. That caused a surge in production and sales. The percentage of new-energy vehicle sales accounted for by commercial vehicles rose to 45.5 percent in 2015 from 38.4 percent in 2014, according to Automotive Foresight.

Also, Beijing in February ordered local governments to make 50 percent of all new fleet vehicle purchases new-energy vehicles, up from a 30 percent mandate.

There are other possible policy boosts for passenger EV sales. On-demand ride-hailing companies are growing quickly in China. Didi Kuaidi, China’s largest, completed 1.43 billion rides in 2015.

At some point, Beijing will require those companies to use EVs, predicts Bill Russo, a managing partner at Gao Feng Advisory Co. in Shanghai.

“If you want a higher penetration and market share of electrification, you can require these on-demand companies to electrify their fleets,” he says. “I can see a quick acceleration of electrification.”

47-mpg target
Regardless of demand, automakers in China will need to produce EVs to meet fleet fuel economy mandates, which call for 5 liters of fuel consumed per 100 kilometers driven, or 47 mpg, by 2020.

KY Chan, CEO of Protean Electric Inc., says that is one reason he found a lot of interest in China for his company’s in-wheel electric-drive systems. Protean, which has offices in Troy, Mich., the U.K. and Shanghai, has investors including GSR and Jiangsu New Times Holding Group, located in eastern China.

“No matter what, even if they are losing money [producing EVs], the OEMs will have to produce a number of new-energy vehicles in order to lower the overall [fuel economy] below 5 liters,” Chan says.

The central government’s EV push has made China a fertile market for fundraising. “The amount of resources flowing into [the EV sector] is just unimaginable,” he says. “In China, I went from a period of no interest to one of a lot of interest.”

Chan figures Chinese investors have a stronger stomach for the cash burn rate of a startup like Protean. It has talked to U.S. companies about being acquired, but “we would become a burden to their balance sheet,” he says.

Perhaps the highest-profile Chinese investment in U.S. electrification companies is Wanxiang’s acquisitions of battery-maker A123 Systems and luxury plug-in hybrid manufacturer Fisker Automotive, renamed Karma Automotive.

Privately owned Wanxiang Group Corp., one of China’s largest automotive suppliers, comes from a very traditional background; it got its start producing driveshafts and roller bearings.

Why did it acquire the two U.S. companies?

“China is committed to producing more and more electric vehicles,” says Pin Ni, president of Wanxiang America Corp. “Wanxiang wants to participate in that growth, and we saw an opportunity to do so by acquiring A123 and Fisker.”

If Wanxiang hadn’t acquired Waltham, Mass.-based A123 in 2013, says CEO Jason Forcier, “the technology would have been sold off to the highest bidder.”

Instead, Chinese ownership enabled A123 to double its capacity, and the company is generating positive cash flow, Forcier says.

A123 is focusing on low-voltage batteries and working with all the major European automakers on 48-volt systems. But China still accounts for a big chunk of the battery-maker’s growth.

“That speaks to the focus of the Chinese government to incentivize these vehicles,” says Forcier. “We haven’t seen that in the U.S.”

“A lot of trust’
Wanxiang acquired A123 customer Fisker, whose problems imperiled A123, in 2014, paying $149.2 million. Wanxiang beat out Hong Kong investor Richard Li, who also was bidding for the electric automaker. The now-Karma Automotive is trying to revive itself from a headquarters in Southern California.

Karma sees the most opportunity in China, which is the world’s largest luxury car market. But it will sell cars in the U.S., as well, says Chief Marketing Officer Jim Taylor.

That kind of U.S. presence is important. Chinese consumers know their country’s long history of shoddy and copied products. Plus, China’s early EV efforts often focused on low price rather than high quality.

“You need to bring in technology that has been certified as non-Chinese,” Gao Feng’s Russo says.

Even in luxury-hungry China, Karma could be a tough sell. “Luxury [EVs] do not have strong potential, because rich people need the premium car’s brand first,” Automotive Foresight’s Zhang says.

But Chinese investors don’t mind taking “long bets” on their investments, Taylor says.

Wanxiang Chairman Lu Guanqiu “has put a lot of trust in our executive team,” he says. “If we were American-owned, that rope would be a lot shorter.”

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GM, Ford China Car Sales Decline in February

The Wall Street Journal, March 7, 2016

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Many car makers posted declining sales in China in February. Above, a SAIC-GM-Wuling Automobile manufacturing plant in Qingdao, Shandong Province. Photo: European Pressphoto Agency

By Christina Rogers

General Motors Co. and Ford Motor Co. both posted steep sales declines in China last month on a year-over-year basis, part of a wider slowdown attributed in part to a drop-off around the Lunar New Year holiday.

Sales for both U.S. car makers fell 9% in February, the companies said, following a string of monthly gains driven by new government subsidies introduced late last year to stimulate demand for fuel-efficient cars.

China’s auto market has bounced back from a slump in the summer of 2015 due to the incentives, which can be applied to 70% of cars sold in the country. But the recent sales declines raise a potential red flag, signaling the world’s largest new-car market could be permanently cooling amid the country’s slowing economic growth.

Through the first two months of 2016, GM and Ford sales rose 11% and 18%, respectively, the companies said. Analysts typically look at January and February sales together to account for the disruption caused by the New Year holiday. The China Association of Automobile Manufacturers will report official February new-vehicle sales in China for all car makers later this month.

Other auto makers also posted declines in February, including Hyundai Motor Co. and Mazda Motor Corp. Sales for SAIC Corp., China’s largest domestic auto maker, dropped 7%, dented by declines reported by joint-venture partners GM and Volkswagen AG , both market leaders in the country.

China car-sales reached a new high in 2015, rising 7.3% from a year earlier to 24.6 million. But the growth rate was slower than the double-digit gains recorded in 2013 and 2014.

The China auto makers’ association projects passenger-car sales in 2016 will expand 7.8% to 22.76 million. Car makers have rushed to build factories and boost production in China, hoping to tap surging demand for new cars created by a rising middle class and rapid urbanization in what is considered one of the industry’s most profitable markets outside the U.S.

January was a particularly strong month for auto makers in China, with sales up 9.3% from a year earlier, as buyers snapped up new-cars before the holiday. Travel tends to be heavy around the holiday, contributing to a decline in showroom traffic last month.

“It’s like a vacuum effect in February,” said Nigel Griffiths, chief automotive economist for researcher IHS Automotive. March results will be the real test to see whether demand created by the government stimulus is starting to fizzle, Mr. Nigel said.

IHS Automotive has issued a cautious forecast for new-car sales in China this year, with growth likely to benefit only certain auto makers. Demand is also starting to shift to local brands with a number of global auto makers posting weaker sales of late.

Ford has 4% of the market in China and recently completed a $5 billion expansion to build new factories and add models. The Dearborn, Mich., auto maker also plans to spend another $1.8 billion on research and development there. GM, Ford’s crosstown rival and among the largest sellers in China, is also trying to increase market share with new models and an expanded lineup of Cadillac luxury vehicles.

“It is a very densely crowded market,” particularly on factory capacity, that can dent sales and profits across auto makers, said Bill Russo, a managing partner with consultants Gao Feng Advisory.

Government tax incentives are helping to prop up new-car demand in China this year but the subsidies only last through December, analysts say.

China’s secret weapon: used car salesmen

The Financial Times, March 1, 2016
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You have probably read, in the Financial Times and elsewhere, that China is the world’s largest car market.

It is not. It is the world’s largest new car market, with sales of 21.1m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China.

In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China’s $470bn.

This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80 per cent of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians.

Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a “used car salesman” and most Chinese people will not understand the reference.

As Chinese leaders gather at their annual parliamentary session later this week, it is worth bearing in mind that they are doing so in a country where one cannot very easily buy a used car.

That fact should reassure Chinese politicians and multinational executives worried about the pace of growth in the world’s second-largest economy, which will be a topic of much discussion at the National People’s Congress.

Government officials insist that the rising “new economy” will balance out the declining “old economy”, allowing the country to grow at an average rate of 6.5 per cent through 2020. The creation of entirely new industries will further support growth.

The inevitable rise of what will soon be the world’s largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.

Another new industry whose time should come soon is China’s private jet sector, which is a fraction of the size of its US counterpart.

But the development of business aviation has been constrained in China by the military’s grip on airspace and many of the smaller airports best suited for private jets. Similarly, a giant new used car market will not spring up by itself. Complicated financial reforms will need to be hammered out in order to facilitate its development.

As Janet Lewis at Macquarie Securities in Hong Kong points out, while regulations governing the sale of used cars vary from province to province, in general dealers must act as brokers between sellers and buyers. That is because value added tax would be incurred if they took temporary ownership of vehicles, putting further strain on already tight cash flows.

When such wrinkles are finally ironed out, the inevitable surge in Chinese used car sales will also benefit car manufacturers now contending with a “new normal” of falling margins in what has historically been their most lucrative market.

In developed economies, ancillary activities including maintenance, trade-ins and used car sales have helped dealers sustain profits as new car margins are squeezed. But in China dealers have too often been, as industry consultant Bill Russo puts it, “dogs who just want to be fed”, solely reliant on buoyant new car demand.

When the going got tougher over recent years, dealers demanded ever bigger discounts and one-off subsidies from their manufacturer suppliers. By contrast, in the boom years after the global financial crisis, China was one of the few countries where to own a car dealership was to collect a lazy economic rent. The pickings were so easy that in at least one recent high-profile corruption case, a senior official’s son was gifted a stake in a Toyota dealership.

The emergence of a proper Chinese used car market will help everyone from the ruling Communist party by boosting economic growth, to the world’s largest multinational carmakers by boosting dealer profits. Who knew that used car salesmen could be such an asset to society?

tom.mitchell@ft.com

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China shifts gears to drive electric car development

The Financial Times, February 25, 2016

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China’s efforts to take the lead in electric vehicle development will focus on battery technologies and public vehicle fleets, in a bid to kick an over-dependence on subsidies, according to officials.

Premier Li Keqiang vowed to “step up support” for the electric vehicle industry at a meeting of the State Council on Wednesday by shifting funds from supporting EV production to rewarding companies that produce new technologies and hit sales targets, according to the government website.

Principal targets include achieving a “revolutionary breakthrough” in battery technologies and using EVs for taxi and bus fleets in major cities.

China considers the development of its EV market a key strategic goal, and policy has encouraged auto producers to focus on fuel replacement in the hope that such technologies will allow them to be competitive abroad while reducing air pollution at home.

Subsidies for producers and buyers alike helped sales rocket to more than 330,000 vehicles in 2015, up fourfold from 2014 but still shy of Beijing’s goal of half a million.

Growth-by-subsidies cuts both ways, however, and reports in Chinese media of widespread “fraudulent” claims by companies that take government money without redirecting their efforts towards the expensive process of EV technology development prompted the Finance Ministry to announce in January that it would phase out subsidies by 2021.

“The age of subsidising manufacturers is whittling away,” said Bill Russo, managing director at Gao Feng, a Shanghai-based advisory. The government has “decided to focus the development down to areas where China can develop some degree of competitive leadership,” he said.

Sourcing and manufacturing battery-related technology, a key component of electric vehicles, is one area in which China has a natural advantage due to its large — and carefully guarded — store of rare earth metals such as lanthanum, which is used to make hybrid batteries.

The success of companies such as US-based Tesla Motors has been as much due to battery technologies as to motors and recharging components, and China is keen to create homegrown champions that can compete in this crucial area. Currently most major EV producers in China are joint ventures with foreign carmakers.

Mr Li’s statements also included a push to use public transport and institutions as a conduit for boosting EV sales, with the mandated percentage of new energy vehicles purchased by public institutions rising to 50 per cent from a previous 30 per cent.

The prospect of updated public transport fleets being encouraged to use only electric vehicles also raises the possibility of an uneven playing field developing, with local manufacturers given priority in bidding for deals.

“When you look at the taxi fleet in any city, they are pretty much buying for the home team,” said Mr Russo. “The local manufacturer has the advantage.”

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James Bond’s Favorite Car Goes Electric

NBC News, February 18, 2016

Aston Martin is going electric.

The very British car manufacturer — best known for its association with that other perfectly proportioned British export, James Bond — just inked a deal with China’s LeEco to make an electric version of the luxury car by 2018.

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Aston Martin made the announcement Thursday at a press conference in Frankfurt, adding that the cars would be manufactured at the company’s flagship plant in Gaydon, England.

LeEco, a Beijing-based tech company, said in a statement, “We have been targeting the highest standard in the auto industry in terms of design, R&D and manufacturing of our electric cars.”

China is proving to be a driving force in the creation of electric vehicles, not just providing the parts but also the innovative technology. Analysts predict that “China will be the epicenter for electrification of the auto industry globally,” said Bill Russo of Gao Feng Advisory Co., who estimates that China will invest 100 billion yuan ($15.5 billion) on new-energy vehicles by 2020.

The new RapidE car will be based on the Rapide S model, which currently retails at around $200,000. No details were disclosed as to the projected price point for the RapidE. No word either on whether it will include revolving license plates, front-wing machine guns, or an ejector seat.