With President Donald Trump’s withdrawal from the Paris climate pact, the leader of the U.S. state with the strictest clean-car rules is turning toward Beijing in his longtime mission to stem automotive pollution.
California Gov. Jerry Brown departed Friday for China, where he’ll urge the world’s most populous country and largest car market to take environmental cues from Sacramento, not the U.S. capital.
Brown — an anti-smog crusader since a previous term as governor starting in 1975 — is now 79 with less than two years left to serve. His gambit in China could create an environmental legacy beyond what he could hope to accomplish in California itself.
“There’s so much propaganda and outright climate denial in Washington,” Brown, a Democrat who attempted runs at the U.S. presidency in three different decades, said in an interview last week.
The trip to China is a way “to forge agreements that will counteract the misguided Republican efforts in Washington.”
Trump’s decision to dump the Paris accord, announced Thursday at the White House, is “an insane move,” Brown said on a conference call shortly afterward. “California will resist.”
In China, Brown will spread the gospel of California’s auto policies, including a state rule requiring an increase in annual sales of zero-emission vehicles powered by batteries or hydrogen. The Chinese government is weighing a similar requirement for automakers competing in the world’s largest vehicle market.
It’s a different story in Washington, where the Trump administration is revisiting stringent vehicle greenhouse gas and fuel mileage standards for 2022-25 following pleas from the auto industry. The rules, enacted by Trump predecessor Barack Obama, would boost the fuel economy of new cars and light trucks to an average of about 50.8 miles per gallon by 2025, up from 30.3 mpg this year.
The pullout from the Paris accord, which Trump called a “massive redistribution of United States wealth,” won’t have a direct effect on the reexamination of the automotive standards. The decision leaves the tailpipe and fuel economy regulations as the lone Obama-era climate initiative that remains largely intact and creates a leadership void that China appears ready to fill.
“China has been working very hard to try and replace the U.S. as the world leader in a number of areas,” said Yunshi Wang, director of the China Center for Energy and Transportation. Trump’s abandonment of the Paris accord, Wang said, “is obviously a big opportunity from the Chinese perspective.”
Under rules that could be implemented next year, a manufacturer selling 100,000 cars and trucks in China would need to sell about 2,500 battery-powered vehicles with a 200-mile range, said Wang, whose center is part of the Institute of Transportation Studies at the University of California Davis. Other compliance options include buying credits from competitors — as with the California rules that China is using as a model — or reducing sales of gasoline-powered cars, he said. California is also helping China develop a cap-and-trade system to limit carbon dioxide emissions from heavy industry and other sectors of the economy.
Zero-emission vehicles could help China with its national-security interest in reducing oil imports, Wang said. In addition, Chinese automakers now see ZEVs as a chance to finally export large numbers of cars and trucks.
“It is good industrial logic to develop products in and for the largest market,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “The U.S. move, together with China’s push, will serve to put China in the position to lead the commercialization of new energy vehicle technologies.”
Some automakers are pressing the government for more time to meet the targets, Wang said. But they also appreciate California’s involvement, since it provides a legal template that they themselves helped developed through long years of legal sparring with the state’s Air Resources Board. Mary Nichols, the board’s chairperson, is scheduled to join Brown on the week-long trip.
Volkswagen AG aims to sell 1.5 million units of zero-emission or plug-in cars in China by 2025 with most of them locally produced, while General Motors Co. is targeting 150,000 units in the same time frame under its Buick, Chevrolet and Cadillac brands.
Wang predicted that by 2025, 10 percent to 20 percent of China’s vehicle sales could come from battery-powered cars or plug-in hybrids. Last year, Chinese consumers purchased 507,000 such vehicles, or more than three times as many as in the U.S.
“China is the world’s largest single market for electric vehicles today,” said Roland Hwang, director of the transportation program at the Natural Resources Defense Council, an environmental advocacy group. A California-like electric car sales mandate “in China will kick the whole global electric vehicle market into even higher gear,” he said.
Brown has vowed to fight attempts by the Trump administration to undermine the state’s stringent auto rules and to go to court if there’s a challenge to California’s 47-year-old permission to enact clean-air rules that are tougher than U.S. standards.
In the interview, Brown accused the U.S. auto industry of backing Trump, saying it hasn’t changed much since General Motors claimed in 1973 that it would go bankrupt if California forced the installation of catalytic converters.
“The leopard is not going to change its spots,” Brown said. “We have to remain vigilant.”
In separate statements, GM and Ford Motor Co. signaled that the Paris withdrawal may do little to sway their plans for current and future electric vehicles. Though neither addressed The pullout directly, Ford said climate change is real and GM said “international agreements aside, we remain committed to creating a better environment.”
Brown’s opposition to Trump’s policies could have political ramifications at home. “Climate change could be a unifying issue that pulls the Democratic Party together if the 2018 midterm elections become a referendum on Trump,” said Alan Baum, an independent auto analyst in Bloomfield Township, Mich.
When you climb into a Tesla (tsla, +2.83%) as a first-time passenger, drivers turn giddy at the chance for show-and-tell—especially in China, where Vanessa Zhu is playing host on this sunny spring day in Beijing.
“It’s huge, isn’t it?” she says, pressing the double-size, iPad-like control screen in the center console until the stereo blasts Adele’s “Send My Love.” Then comes the ceremonial closing of the gull-wing doors on Zhu’s Model X. We peer through an expansive glass roof. Zhu, the assistant to the chairman of a major marketing agency, likes SUVs for their safety on China’s chaotic roads—she and her husband upgraded from a BMW X5. One of the first Model X owners in China, Zhu paid a deposit before Tesla had even calculated how much a deposit should be.
“Now put your head back against the seat,” she advises.
The two-lane road we’re on is missing traffic lines, not to mention levelness, but as a section clears ahead, Vanessa floors it. We whir past a small black Hyundai so fast that the car seems to turn stationary. For a second, driver and passenger feel the same head rush. Then Vanessa slams on the brakes to respect a stop sign, chuckles, and changes Adele songs.
The sight of Teslas whizzing down roads in China’s biggest cities is becoming as common as—well, the sight of Teslas whizzing down roads in Silicon Valley.
In 2016, Tesla tripled its sales in China over the previous year’s, to 10,400 vehicles, according to research firm JL Warren Capital, or about 13% of the nearly 80,000 cars it delivered worldwide. The company reported in March that it earned $1.1 billion in revenue in China last year—a boost that helped Tesla join the ranks of the Fortune 500 for the first time, with just over $7 billion in revenue worldwide. And Tesla’s China news has only gotten better since then: Its imports in the first three months of 2017 have put it on pace to easily double sales this year. Wealthy drivers are crowding showrooms in China’s major cities, and Chinese buyers have put down $1,200 to preorder the company’s Model 3 sedan in numbers second only to those in the U.S.
The sales rush is the clearest sign yet that Tesla has turned a corner in the world’s largest auto market. And it has caught almost everyone by surprise. As recently as last summer, the narrative had been that Tesla just didn’t get China. The automaker was on track for its third consecutive year of weak sales. The few consumers who knew about Teslas didn’t know how to recharge one; those who preordered had faced delivery delays and iffy service. What’s more, Tesla lacked the joint-venture partners that helped other foreign carmakers break into China’s market. Michael Dunne, who runs independent advisory Dunne Automotive in Hong Kong, wrote a column in September predicting Elon Musk would reach Mars before cracking China.
Today, Dunne is cheerfully sheepish about that column, and other naysayers are equally befuddled. There’s no single explanation for Tesla’s breakthrough. Sales got a lift from the introduction of the Model X, a luxury SUV for an SUV-mad country. The company also benefited from a critical mass of charging stations; from its direct-sales model, in a country where buyers feel fleeced by dealerships; and from CEO Elon Musk’s celebrity among the technorati.
But chummy government relations also matter in a country where the state exerts enormous economic control, and Tesla’s technology just happens to align perfectly with government priorities. Cofounder Martin Eberhard has said Tesla was started to fight climate change. Nowhere is the climate fight more important than in China, the world’s largest spewer of greenhouse gases, which is in the midst of an unprecedented promotion of electric cars: Last year, sales of electric and plug-in hybrid vehicles in China rose 50% to 507,000, more than three times the U.S. figure.
The government estimates that as many as 7 million electric cars could be sold in China annually by 2025. It sees them as a way not only to clear smoggy skies, but to hack into the top rankings of the global auto industry. In electric, Chinese companies don’t have to match the quality of a Ford or Mercedes-Benz; they think they can quickly build a whole new car. “For electric vehicles in China, we have a new technology model every two years,” says Dong Yang, a high-ranking Communist Party official at the China Association of Automotive Manufacturers, the auto lobby.
Still, virtually all Chinese electric cars are low-cost, relatively low-performance ones, without the luxury trimmings and lightning-fast acceleration that Tesla owners fetishize. Government officials consider Tesla a role model for these Chinese brands, and they’ve cheered the company from the sidelines. Today, a handful of Chinese companies and cities are feverishly courting Tesla for a joint venture, Fortune has learned, and Musk has said his company could begin building cars in China before the end of 2018.
A joint venture could turn Tesla’s China growth stratospheric, because its current model of importing cars from California is costly. Chinese tariffs and taxes boost the price of Tesla’s sedans and SUVs in the country by 50% compared with the U.S.; the Model S sedan starts at the equivalent of $105,000, and the Model X at $130,000. So even as Tesla woos middle-class buyers in the U.S. (the Model 3, due to arrive this fall, will start at about $35,000) buyers in China have mostly resembled Vanessa Zhu: wealthy drivers who view Teslas as luxury vehicles, or at least as the coolest new piece of tech since the iPhone. Most of Tesla’s 2016 sales were concentrated in Beijing, Shanghai, and Shenzhen, China’s centers of capital and affluence.
Even if Tesla doesn’t become a mass-market brand, sales in China alone could soon climb to 100,000 a year, impacting Tesla as intensely as a new, 1.4-billion-person market would Coca-Cola. “I could see a future where Tesla is displacing a lot of those Audis and Mercedes-Benz that are everywhere on Chinese roads,” says Dunne.
Not bad for a company that, until recently, was digging out from under past mistakes.
Tesla began taking preorders in China for the Model S in August 2013. The company didn’t know exactly how much each car would cost, and deliveries were eight months away. But anticipation ran high. The combination of Musk’s renown, stories comparing Tesla’s acceleration to a Ferrari’s, and intrigue over the new technology sent preorders above 5,000 by the end of the year.
The hype was there, but the sales and support were not. The original head of Tesla’s China business was Kingston Chang, formerly of luxury automaker Bentley. Chang wanted to broadly expand Tesla’s operations, including customer service centers, public relations, and car-charging networks, according to tech news site PingWest. But Tesla headquarters told him to build a sales team first, betting that good marketing could bring in more revenue before more stores and charging stations were finished being built. Tesla opened just a single showroom in Beijing, opposite an American Apparel store in one of the city’s glitziest malls.
Tesla’s strategy shifted again after Veronica Wu came aboard in December 2013, after a successful stint in big enterprise and education sales for Apple in China. At Tesla, she discussed adding traditional outlets like dealerships to the mix, similar to the way Apple had added retail channels in China. Though headquarters balked, Tesla in China was soon encouraging fleet sales orders of 100 or more cars from car-rental agencies and institutions, to jump-start demand. Staff, especially salespeople, soared from 10 employees to more than 100, and later to 600.
At the same time, Tesla imposed rules that frustrated individual buyers. Before customers could order a car, Tesla required that they prove they had a parking spot and a home charger, to ensure a good experience. The company also required that buyers live in a city that had a Tesla service center—even though, as of mid-2014, only Beijing and Shanghai had such centers. Some high-rise apartment managers, meanwhile, balked at having chargers installed in their buildings.
The mismatch between Tesla’s approach and customer demand created a big opportunity for gray-market resellers—who bought in bulk and catered to buyers who didn’t meet Tesla’s criteria. The company had no official resellers, but the cars made their way to many, who sold in dealerships, car centers, and even on Alibaba’s TMall for more than the same models cost on Tesla’s website. “There were a lot more scalpers than we expected,” Wu now says. Others questioned whether the company was really in the dark: “Most ‘fleet’ sales were just a flimsy cover for sales to resellers,” concluded Bertel Schmitt of Dailykanban.com, an auto industry site. It was all legal, but also a sign that Tesla had strayed from the high-touch sales approach it used elsewhere.
Tesla’s first China deliveries arrived in spring 2014; Wu later told Reuters that China sales could drive 35% of the company’s growth. But that was already sounding fanciful. Tesla was hurriedly building customer-service centers, and customers outside of Beijing and Shanghai were told they wouldn’t get their cars until those centers were finished. One buyer made national news when he smashed the windshield of his own Tesla, after it arrived months later than expected. Meanwhile, the Chinese press didn’t shower Tesla with as much coverage as the West’s did. As a result, most potential customers didn’t know much about Tesla’s product. Consumers didn’t know they could charge their car at home every night like a cell phone; most thought they had to rely on the still-small Supercharger network.
By the end of 2014, Tesla’s business was a mess. About 4,700 cars had been shipped to China, but only 2,500 were sold and registered to drivers. (The company delivered 18,500 cars in the U.S. that year.) Publicly, Tesla blamed the gap on speculators who entered orders, then didn’t buy the Teslas once they shipped. But several former employees say the real problem was the lack of customer support. Says Ricardo Reyes, Tesla’s former communications chief: “I think Tesla took for granted that they were just going to succeed in China.”
By December 2014, both Chang and Wu had left Tesla. Tesla executives in California griped privately that China wasn’t so unique that it demanded a different strategy. But not long afterward, the company began an apology tour that marked a turning point. On a frigid evening in January 2015, during the Detroit International Auto Show, Musk admitted China sales were “unexpectedly weak.” That spring, he traveled to China to meet with President Xi Jinping and other leaders, tweeting that he remained “very optimistic” despite “earlier mistakes.” Reyes offered a mea culpa at the Shanghai auto show in spring 2015, the first Chinese motor show that Tesla bothered attending: “I think we have been a little bit too impatient in the Chinese market.” It was as contrite as the company would get—and the news it was generating was about to get better.
In 2015, Tom Zhu, a respected engineer responsible for China’s Supercharger network, became the top executive in the country. The company ended that year with a disappointing 3,700 cars sold, but there were slivers of optimism. For one thing, Tesla was building Supercharger locations in China at a faster pace than anywhere in the world, addressing consumers’ “charge anxiety.” About 120 Supercharger locations exist in China today, compared with 370 in the U.S., and Tesla says China will have more than 800 charging stations by the end of 2017.
Just as important: Word was getting out that buying a Tesla was easier than buying other luxury cars. In China, dealerships known as “4S stores” (for “service, spare parts, sale, and survey”) largely corner the market for popular luxury brands like BMW, Jaguar Land Rover, and Mercedes-Benz. The stores inflate costs for consumers by tens of thousands of dollars with various vague fees. Tesla’s direct-sales showrooms eschew that system. And while import tariffs increase their overall cost, Tesla otherwise prices its cars in China at the same level that it does in the U.S. after currency adjustments.
Vanessa Zhu visited three other brands before she settled on her Model X. The Range Rover dealership asked for an additional 300,000 yuan ($45,000) as its standard fee, she says; Porsche told her she had to wait three months for its Cayenne SUV and required a 100,000-yuan delivery fee. Tesla in contrast, put her on a one-size-fits-all waiting list and didn’t impose fees. “In China, a car is a symbol of your status, so most people don’t care what you pay in terms of those extra fees,” Zhu says. “But I do care. I don’t like it.”
Tesla owners also found out they could beat China’s bureaucracy in the license-plate game. China’s local governments restrict the number of drivers on their clogged, polluted streets by controlling the number of plates issued. Drivers have to wait years to get one through a lottery system. (In early 2015, 6.2 million people applied for just 36,757 available Beijing plates.) And once drivers get a plate, they are barred from driving one day a week.
But plates for electric cars now fall under different rules, thanks to the government’s push for electric vehicles. Beginning in 2014, Shanghai allowed electric-car drivers to get a license plate without facing a wait, a $12,000 plate fee, or driving restrictions. Other cities followed suit, and such policies became a boon for China’s electric-car makers. Without them, “there’s no possibility that private consumers would buy these vehicles,” says Zhang Yong, deputy general manager at the electric-car offshoot of state-owned Beijing Automotive Industry Holding Co.
The policies were game changers for Tesla too. The first six cities in China to have exempted electric vehicles from license plate restrictions: Shanghai, Beijing, Shenzhen, Hangzhou, Guangzhou, and Tianjin. The cities with the highest Tesla sales, according to Junheng Li of JL Warren Capital: Shanghai, Beijing, Shenzhen, Hangzhou, Guangzhou, and Tianjin.
While the policies helped sell Model S sedans, Tesla realized quickly that the Model X would be a much bigger story in China. China’s obsession with SUVs is 10 years old and going strong. Their popularity stems from a variety of factors: Domestic makers produce good models; their seating can accommodate an entire extended family; they’re widely believed to be safer; and their higher prices imbue status. German luxury-car maker Porsche’s bestselling vehicle in China isn’t a sports car but its Macan SUV.
By 2015, SUV sales were the only growing part of the Chinese auto market; in the first half of 2016, SUVs accounted for 35% of passenger-vehicle sales. It’s no coincidence, then, that a spike in Tesla sales coincides exactly with the first Model X deliveries in China, in June 2016. In the second half of last year, with the SUV available, Tesla notched 7,670 sales—about three-quarters of its total for the year in China. Tesla’s sales had finally caught up to its hype.
Close government relations are a must in China for foreign companies, and Tesla has carefully cultivated them. Like Apple, Tesla has created new businesses thanks to its demand for Chinese-made components, particularly its cars’ giant touch screens. In 2015, Tom Zhu said Tesla would double its spending on Chinese-made parts, committing to buying $500 million worth of supplies from Chinese companies that year; such spending has likely only skyrocketed.
The far bigger question mark is whether, and when, Tesla will announce plans for a factory in the country. Every car brand with significant China sales—including luxury-auto makers like Mercedes-Benz and BMW—runs a joint venture with a local partner. The government has required as much for decades. Imported cars face hefty fees, as Tesla owners are painfully aware. A Model 3 sedan’s $35,000 starting price in the U.S. becomes $50,000 in China after a 25% tariff and 17% value-added tax—a heavy lift for a middle-class buyer. “If they don’t announce plans for local production, they will struggle to sustain this performance,” says Bill Russo, former head of Chrysler North East Asia and managing director of Gao Feng Advisory in Shanghai.
Tesla remains cagey about what those plans could look like. Dong Yang, the auto lobby official, says several potential local partners are courting the company, and that multiple provinces and municipalities want Tesla to build a plant with them: “They all offer better and better options,” Dong says. In May, Musk said Tesla would more clearly define its plans for China production by the end of this year; a spokesman declined to give further details.
Tesla Joins a Very Exclusive Club
When Fortune introduced its list of the 500 largest U.S. companies by revenue, in 1955, it included five U.S. automakers. By 1999, only Ford and General Motors remained. Tesla is the first new car manufacturer ever to join the list. Here, a look at Fortune 500 carmakers from years past.
Tesla may be hesitating because of today’s sales numbers. If you build fewer than 100,000 vehicles a year, it doesn’t make sense to manufacture in China, says Steve Man, analyst at Bloomberg Intelligence in Hong Kong. Tesla’s factory in Fremont, Calif., can churn out more than 500,000 vehicles annually. Even if it doubles China sales this year, Tesla will just pass 20,000 cars. It faces a catch-22: It won’t sell cars at lower prices that drive sales if it doesn’t produce them locally, but local production won’t be economical until sales rise drastically.
Intellectual property is a looming headache as well. Critics of Chinese business practices argue that Tesla faces certain IP theft as soon as it brings manufacturing into China. “Yes, some of its tech will be stolen,” says Crystal Chang, a lecturer at University of California at Berkeley who studies China’s auto market. But Chang adds that the danger inherent in that theft is overstated. “Just stealing tech does not make [a rival] a competitor,” she says. “It’s all about brand.”
Today more than a dozen Chinese-backed manufacturers (many of them American startups that now have Chinese owners) are tripping over one another to promote their electric cars and acceleration times; Faraday Future, Karma Automotive, NextEV, and Future Mobility are but a few. But most are likely to be stuck in the concept or prototype phase for the next several years—even as Teslas zip across China.
That’s one reason Tesla may be able to reach an agreement to produce cars in the country on favorable terms. China lusts after Tesla’s technology but also its management practices. And Tesla already offers its patents to anyone who asks—making it highly plausible that Musk would agree to more information-sharing in return for a vastly expanded market for Tesla’s cars.
One big Chinese corporate player seems to have no doubt about Tesla’s prospects. In late March, Tencent, the politically connected technology giant that recently became one of the world’s 10 largest publicly traded companies, said it spent $1.8 billion buying Tesla stock. Not long afterward, Tesla’s market capitalization edged past that of General Motors, making it the most valuable American automaker.
On a recent Sunday night, three dozen prospective buyers gather in a Tesla showroom in Beijing for a wine tasting. The crowd of mostly thirtysomethings skews wealthy, and cares some about the environment, but they’re mostly in awe of the brand. Tesla’s buyers’ circle has expanded to include the rich along with the very rich. Jeff Yu, whose family runs a yogurt business, thought about buying an SUV from Mercedes-Benz or Maserati, but was put off by their glitz. “Tesla is a tech thing. That’s my taste,” he says.
Evan Qu, a slim man sporting a designer shirt and Buddhist wrist beads, sells audio equipment; he thinks executives at his biggest customer, CCTV, the central broadcaster, will appreciate the environmentalist aura of the Tesla when he rolls up to their next meeting. “This car helps you get more deals,” he says. On Tesla’s website, he’s customized his Model X—color: ocean blue—for a total cost of 1.2 million yuan ($175,000).
A waiter refills Qu’s glass as a promotional video on a loop in the background underscores his aspirations. Choose a Tesla green vehicle, it says, over and over, to advance a better life in the future.
A version of this article appears in the June 15, 2017 issue of Fortune with the headline “Tesla Makes a U-Turn in China.”
The China auto market is transitioning from a period of rapid growth and expansion of individual car ownership to a future where mobility needs are served via a more diverse stream of personal mobility solutions. Personal mobility solutions now include new cars, an expanding supply of good quality used cars, as well as on-demand mobility (ODM) services (including bike sharing and ride hailing) for people who prefer a pay-per-use model over ownership.
China’s market is also quite unique with its short history of car ownership, ultra-dense urban population, and high penetration of the mobile internet. With an urbanization rate of 56%, China’s urban population now exceeds 750 million people, and the transportation needs of this increasingly urbanized population has driven the explosive demand for personal mobility. With a car population of over 190 million vehicles at the end of 2016, individuals who own cars are still far outnumbered by those who do not, and mobility needs are increasingly served through mobility services “usership” beyond just individual car “ownership”.
In this context, automakers are expanding their focus from the product (the “automobile”), to the utility that is derived from the product (“automobility”), and are challenged to create a business model and digital ecosystem optimized to provide digitally-enabled solutions for both car owners and users.
We will discuss: How are these factors shaping the auto market in China? What solutions are being developed to ease mobility “pain points” in China? How do you see these solutions impacting and shaping our everyday lives today and in the future? How will this impact the structure of the industry going forward?
Innovations such as these, originating from both traditional OEMs and new mobility solutions platforms, many of whom are Chinese, is paving the way to an entirely new business model for China’s auto industry.
Topics for discussion:
Defining the disruption in the China context – What are the disruptive trends in the world of mobility?
Big picture view of the competitive landscape – What does the new competitive landscape look like and how will it evolve?
How should incumbents respond? Disrupting or being disrupted? – What new internal capabilities are required? How to work with local start-ups: compete or collaborate?
China for the world – Will China lead to world’s development and innovation in Connected Mobility?
Prof. Dr. Jochem Heizmann, Member of the Board of Management, Volkswagen AG; President & CEO, Volkswagen Group China
Mr. Olaf Kastner, President & CEO, BMW Group Region China
Mr. William Li, Founder & Chairman, NIO
Dr. Daniel Kirchert, President & Co-Founder, Future Mobility Corporation
Mr. Bill Russo, Managing Director, Gao Feng Advisory Company
China’s automotive industry is entering a period where discontinuities and disruptions are likely to reshape the competitive landscape – and this represents an opportune time to guide the development in alignment with China’s overall industrial development goals. With the issuance in April 2017 of the Automotive Industry Mid to Long Term Development Plan, the Ministry for Industry and Information Technology (MIIT) provides “guiding principles” for the development of China’s auto industry for the next decade.
Leveraging new energy and connected vehicle technology as entry points for accelerating auto industry development and transformation, the policy’s objective is to transform China from the largest auto market to a global leading automotive production base. Specifically, the guideline sets a goal for Chinese new energy vehicle (NEV) companies to be among the Top 10 NEV companies worldwide by 2020, and to further expand their global impact and market share by 2025. A target has been set for the domestic NEV sales to reach 2 million units by 2020, and 7 million units by 2025 (20% of total vehicle sales).
Chinese automakers have struggled to reach a global leadership position in the automotive industry due to their relatively short history and lack of technical experience in advanced automotive technologies centered on the internal combustion engine. The NEV market opens a window for China to potentially level the playing field and assume a more competitive position versus the global industry, as multi-national players have not yet established a sustainable market leadership position.
 New Energy Vehicles include Plug-in Hybrid (PHEV) and Battery Electric Vehicles (BEV)
China’s automotive industry has entered a new phase where new car sales growth decelerates, while the car population expands and the average car age increases. This brings enormous opportunities for expansion of the independent aftermarket.
In this paper, we examine the complexity of China’s independent aftermarket including the distribution channel and service shops. We also examine the key success factors, market dynamics and emerging marketing channels in the independent aftermarket. We will highlight the implications of these developments for key players along the value chain.
Title: China’s Auto Industry in the Age of Disruption – The Birth of the “Automobility” Business Model
For global automakers and their suppliers, China represents the greatest opportunity for growth in the 21st century. Since 2009, China has been the world’s largest market by volume, and surpassed 28 million units in annual car sales in 2016. Over the coming decades, we believe that China will remain the key battleground for dominance of the global auto industry. However, this battle will not be waged using the conventional automotive technologies which have been refined over the past century. We believe several driving forces, which are particularly evident China, have the potential to disrupt the status quo of the automotive industry:
The unique context of China’s urban transportation challenge, the high penetrationrate of mobile internet, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts, are compressing the time needed to commercialize smart, connected car technology and related services.
The automotive value chain is being disruptedby non-traditional players as they enter and compete to deliver mobility solutions. Disruptive new entrants are utilizing big data to draw insights about customers’ mobility patterns in order to address their “pain points” and offer new solutions for their mobility needs. Such mobility needs are increasingly being met through on-demand and shared services versus individual ownership.
It is the confluence of these forces, along with rapid innovation to address “pain points” associated with mobility in the China context, are positioning China as the catalyst to drive the transformation of the business model and technological underpinnings of the global auto industry. In this course, we highlight the major disruptions that lie in the path to success in China’s automotive industry, including:
The rapid rise of on-demand mobility and the digital mobility ecosystem
The link between hardware innovation and the economics of the digital ecosystem
The explosive growth of aftermarket services and the emergence of the Independent Aftermarket (IAM) and online-to-offline (O2O) channel
Bill Russo delivered a keynote address at the Intertraffic’s 2017 China conference at Shanghai’s New International Exposition Center. The topic was “China’s Auto Industry in the Age of Disruption: The Birth of the Automobility Business Model”.
China’s automotive industry is entering a period where discontinuities and disruptions are likely to change the competitive landscape – and this represents an opportune time to guide the development in alignment with China’s overall industrial development. With the issuance in April 2017 of the Automotive Industry Mid to Long Term Development Plan, the Ministry for Industry and Information Technology (MIIT) provides “guiding principles” for the development of China’s auto industry for next decade.
Bill Russo was a guest on CGTN’s China 24 program to discuss these developments. His interview appears at the 28th minute of the program.
Most auto executives have reasons to feel at ease after hitting the one-million annual sales mark in China, an exclusive club that includes General Motors Co. and Volkswagen AG. For Great Wall Motor Co.’s Wei Jianjun, the feat stoked fears that the SUV maker may be doomed.
That’s because history is littered with companies that grew big but eventually failed because their products became a commodity and lacked the star power to create clamor among customers, according to the chairman of the manufacturer that has kept a 14-year streak as China’s top SUV seller.
“Moving up is testimony of a company’s strength; if you can’t, you’ll disappear the way Nokia did after Apple muscled in on their turf,” Wei said during a recent interview in Hong Kong, as he recalled how the iPhone maker upended the mobile-phone industry and eventually toppled the erstwhile Finnish leader.
Wei’s paranoia signals the maturing of the world’s largest auto market, where an increasingly sophisticated middle class is no longer satisfied with cheap, me-too products. China’s more successful homegrown automakers, also including Zhejiang Geely Holding Group Co. — the owner of Volvo Cars — and BYD Co., have embarked on efforts to burnish their nameplates in the belief that with more than 100 brands competing for buyers, the fight will be won by those who look beyond price competition to create income streams from products with higher profit margins.
For Great Wall’s Wei, it turns out, the effort also involves adopting the English name “Jack Wey” and creating the premium nameplate “WEY.” Sales of the brand’s first model that has features such as a warning system for lane changes are set to begin at the Shanghai auto show this week, and another three models will be added this year, Wei said.
Wei, a native of Baoding born in 1964, has built Great Wall into China’s top seller of SUVs without leaning on any foreign partners, and by offering consumers spacious models at cheaper prices than sedans such as Volkswagen’s Passat and GM’s Buick. That strategy helped boost deliveries to a record 1.07 million units last year, outpacing industrywide growth.
At 26 — and after several factory jobs — Wei took over a small car-modification business and turned it into a van maker. He later shifted focus to pickup trucks after witnessing their popularity in Thailand. Small business owners and farmers turned Great Wall’s Deer into China’s most popular pickup brand by 1998. And in 2002, he rolled out the first Haval SUV model. The popular Haval H6 accounted for more than half of the company’s deliveries last year.
The idea for going upscale came just over four years ago when branding guru Al Ries, chairman of the Atlanta-based market-strategy firm Ries & Ries that counts Microsoft Corp. and Ford Motor Co. among its clients, advised Wei to create a separate brand. “Jack Wey” would help foreigners get around the difficulty of pronouncing Wei’s name in Chinese, Wei was told.
“A new idea requires a new brand name. To keep a company competitive in the future requires a constant launch of new concepts,” said Ries. “The future belongs to multiple brand companies, not single-brand companies.”
As Chinese consumers shift their tastes away from sedans, demand for roomier SUVs is surging, with such vehicles accounting for 37 percent of the total sales last year, up from 5.7 percent a decade ago. Still, the introduction of WEY comes at a time when new models are flooding the market. PSA Group to Hyundai Motor Co. are boosting their lineup in the segment. Geely, owned by billionaire Li Shufu, will start selling the first SUV model under its new upscale Lynk & Co. from the fourth quarter, using the same platform adopted by affiliate Volvo Cars.
“We added WEY brand to prepare for the SUV market to enter the price competition era,” said Wei, who has a net worth of $5.3 billion, according to the Bloomberg Billionaires Index. “Sales of WEY brand cars will bring us higher profit margins and with the rising sales volume, it will make bigger contribution to Great Wall’s bottom line.”
Shares of Great Wall fell 2.2 percent to HK$8.91 as of 3:19 p.m. in Hong Kong. The benchmark Hang Seng Index declined 1.1 percent.
WEY carries features usually found in more-expensive foreign models, such as a cruise control that maintains a safe distance from the car ahead. The marque targets buyers who patronize brands such as Kate Spade, Calvin Klein and DKNY, according to Wei.
Wei estimates the new brand will have a gross profit margin of about 27 percent. Great Wall is more profitable than some of its peers including General Motors and Volkswagen.
“Even successful mass-market players like Hyundai have struggled to add brands above their mainstream brand,” said Bill Russo, managing director of Gao Feng Advisory Co. and a former head of Fiat Chrysler Automobiles NV’s Chrysler unit in China. “In the age of hardware commoditization, he will need a key feature to attract upscale consumers or a unique selling proposition. The odds are against him, but he’s beaten the odds so far.”
Great Wall is targeting to sell 56,000 units of WEY brand vehicles this year, competing with Toyota Motor Corp.’s RAV-4, Honda Motor Co.’s CRV and Volkswagen’s Tiguan SUVs. The first model will be priced in the 150,000 yuan to 200,000 yuan ($22,000 to $29,000) range, according to Wei. That would put the vehicle in the same bracket as Great Wall’s H8 and H9 models.
Wei, who rues the fact that his company didn’t change its strategy quickly enough to focus only on SUVs, isn’t satisfied with being leader in the segment just at home. Great Wall is in the process of selecting a site in the U.S. to assemble Haval vehicles after reviewing an earlier plan for Mexico. Wei wants Haval to surpass Jeep and Land Rover becoming the world’s biggest SUV brand by 2020 and Haval H6 to become the global No. 1 by then.
“By counting on a strong domestic market, we will develop our global business and build our brands into global ones,” Wei said. “It’s a huge challenge and a golden opportunity as well.”
Consumer demand, availability of batteries are some of the manufacturers’ concern
Trefor Moss and Mike Colias
SHANGHAI—The world’s top auto makers are gearing up to build electric cars in China, despite concerns about market demand and the potential their technology could be compromised in a market with weak safeguards for intellectual property.
Companies including VolkswagenAG , General Motors Co. and Toyota MotorCorp. set out plans for electric-car production in China at this week’s Auto Shanghai vehicle expo, bowing to pressure from Beijing.
China is the world’s largest market for electric vehicles, or EVs, and auto makers who don’t set up production here could find themselves shut out of it.
Even so, some admit privately to being anxious about opaque regulations governing battery production and technology transfer, and misgivings about near-term demand for battery-powered cars.
GM, for example, confirmed it would build a Buick version of the plug-in hybrid Chevrolet Volt in China with its local partner, SAIC Motor. But Mark Reuss, GM’s product-development chief, sounded less than bullish when asked if there was genuine demand for EVs in China.
“I think there could be,” Mr. Reuss said.
Ultimately, the indispensability of China’s auto market meant it was “manifest destiny” that foreign auto makers would agree to set up electric-car plants in China sooner or later, said Bill Russo, Shanghai-based managing director at consultancy Gao Feng Advisory.
TeslaInc., which didn’t attend Auto Shanghai, is now almost alone in having not yet lined up to confirm plans to manufacture electric cars in China. Even Toyota, which previously rejected the EV technology in favor of hybrids and fuel-cell vehicles, said it would ramp up EV development.
An estimated 350,000 EVs were sold here last year, roughly half the global total. Most analysts expect the market to grow especially quickly as China moves to reduce air pollution from gas-powered vehicles and offers incentives for consumers to buy EVs.
Auto makers are unsure about demand, however, fueling concerns that they may need to offer big discounts to move inventory. Automotive Foresight, a Shanghai-based research company, estimates 650,000 to 2 million electric and plug-in hybrid vehicles will be sold in China in 2020, out of an estimated 26 million car sales over all that year.
At the auto show, Toyota’s senior managing officer, Hiroji Onishi, told reporters he felt “skepticism [about] whether the consumers would still want to buy EVs” once subsidies disappear, which is expected to occur about 2020.
Industry caution isn’t Beijing’s concern, however. Starting next year auto makers expect they will be required to locally produce a specific number of electric or plug-in hybrid vehicles proportionate to their total output, according to foreign car firms involved in ongoing negotiations with the government.
Building cars locally makes it far easier to generate sales, since China slaps a 25% tariff on imported cars. But, profits from locally built cars must be shared with a Chinese joint venture partner.
Last month the European Chamber of Commerce in Beijing attacked Chinese industrial policies, questioning a new EV manufacturing law that calls for foreign auto makers to demonstrate their green-car technology before they can build them in China.
The law could just be a ploy to get foreign car makers to reveal technology secrets to their local Chinese partners, the chamber warned. China’s industry and information technology minister Miao Wei rejected that interpretation, and assured foreign manufacturers last month that they would not be compelled to hand over intellectual property.
Volkswagen China Chief Executive Jochem Heizmann said he was sufficiently reassured by Mr. Miao’s remarks to push ahead with an EV “offensive” involving the local production of eight plug-in hybrid or pure electric models, including a mass-market vehicle set to enter production next year through a new joint venture with Anhui Jianghuai AutomobileCo. Mr. Heizmann said Volkswagen aims to sell 1.5 million green cars in China by 2025.
GM’s target is more modest, at 500,000 by 2025. Even so, GM’s commitment now contrasts with the reluctance voiced by then-chief executive Dan Akerson back in 2011. Mr. Akerson said “technology risks” meant GM would hold back from building the then-new Volt in China, even if it meant missing out on government incentives.
Batteries are among the technology risks that some auto makers say still remain in China. Chinese regulations require that EVs built here use batteries made in China, but as yet no foreign maker of EV batteries has received certification.
Earlier this month Ford MotorCo. said it, too, would start building EVs in China. The company aims to use batteries produced by PanasonicCorp. , said Trevor Worthington, Ford’s vice president for product development in Asia. He dismissed concerns expressed privately by some auto makers that China might shut out foreign battery makers, saying that would contravene World Trade Organization rules.