Tesla Working With Shanghai to Explore Auto Making in China

Bloomberg News, June 22, 2017

Tesla Inc. said it’s working with the Shanghai government to explore local manufacturing in China, a move that would allow the electric-car maker to achieve economies of scale and bring down manufacturing, labor and shipping costs.

The electric-car maker led by Elon Musk expects to more clearly define production plans by the end of the year, according to an emailed statement. While most of its production is expected to remain in the U.S., the Palo Alto, California-based company said it needs to establish local factories “to ensure affordability for the markets they serve.”

Reaching a deal to produce cars in China would help Tesla better compete with local rivals because it would eliminate a 25 percent import tariff that makes Tesla’s Model S sedans and Model X sport utility vehicles more costly than in U.S. showrooms. The company is scheduled to begin production in July of the Model 3, the cheapest model in its lineup so far, from its lone assembly plant in California.

“The entrance of Tesla into local production is a necessary step for Tesla to gain relevance in the world’s largest EV 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. “Tesla’s participation thus far has been limited to imported Model S and Model X cars. However, unlocking the mass market will require a price point that is only achievable with a locally produced Model 3.”

Tesla shares rose 1.2 percent to $380.92 at 11:12 a.m. in New York and are up 78 percent this year. The company’s statement didn’t specify which Tesla products are being considered for local manufacturing in China.

For more on how Tesla may break the auto mold with its China entry

China has identified new-energy vehicles as a strategic emerging industry and aims to boost annual sales of plug-in hybrids and fully electric cars 10-fold in the next decade. A total of 507,000 new-energy vehicles including electric cars were sold last year in the country, according to the China Association of Automobile Manufacturers. About 15 percent of Tesla’s $7 billion in revenue last year was generated in China, according to data compiled by Bloomberg.

Tesla has signed a preliminary agreement with the city of Shanghai to produce vehicles in China for the first time, Bloomberg News reported earlier. The agreement would allow Tesla to build facilities in Shanghai’s Lingang development zone, according to people familiar with the negotiations. Under existing rules, Tesla will also need to set up a joint venture with at least one Chinese company to obtain the necessary manufacturing permits.

Shanghai Lingang Holdings Co., a state-owned industrial zone developer and landlord, said in a filing it hadn’t had contact with Tesla. The carmaker said in its statement Thursday that it’s been working directly with the Shanghai municipal government.

“It’s just at the right moment for Tesla to localize production because China now has suppliers with world-leading technology,” said Fu Yuwu, president of the government-backed Society of Automotive Engineers of China. “Tesla will also need to develop customized mass-market products for Chinese market, which is unique from the rest of the world.”

— With assistance by Yan Zhang, and Tian Ying

Click here to view on bloomberg.com

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.”

Click here to read this article at Automotive News

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.”

Click here to read this article at FT.com

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.

skyfall-daniel-craig-as-james-bond-with-aston-martin-db5_fc9fd22f936a7024fabe1d04d482ef62.nbcnews-ux-600-480

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.

China Drives the Future of Automotive Innovation

Gao Feng Insights Report, October 2015

We are pleased to share with you a report titled: China Drives the Future of Automotive Innovation.  This new report is the product of a collaboration between Gao Feng Advisory Company and our partners at Tech Mahindra.  Tech Mahindra is a specialist in digital transformation, consulting and business re-engineering solutions, and is is also amongst the Fab 50 companies in Asia as per the Forbes 2014 List.

For global automakers, China represents the greatest opportunity for growth in the 21st century.  Since 2009, China has been the world’s largest market by volume, and will likely surpass 25 million units in annual car sales in 2015.  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 highpenetration rate 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 disrupted by 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.

We believe that 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 report, we highlight the six themes that are shaping the future of mobility, and describe the key features and functions of future automobiles.

We welcome your comments and feedback on our briefing paper or in general about our firm.  We would be glad to meet you in person to share our data and perspectives in a fuller manner.  Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Best Regards,

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Aloke Palsikar
Senior Vice President & Global Head, Manufacturing Vertical
Tech Mahindra, Ltd
aloke.palsikar@techmahindra.com

Tel: +86 10 5650 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Ripples of emissions scandal felt in China

Nikkei Asian Review, October 1, 2015

20150929_vw1_article_main_image

The U.S. limits nitrogen oxide emissions to half the amount allowed in Japan and Europe. © Reuters

Click here to view the article at Nikkei Asian Review

SHANGHAI/BEIJING — On the face of it, Volkswagen’s diesel scandal should have little impact in China, the company’s largest market, as none of the models involved are sold in the country. However, the German manufacturer, which through its joint ventures with local automakers SAIC Motor and FAW Group has seemed to be able to sell anything with a VW badge, may be facing a profound change in attitudes among Chinese consumers.

     Last year, the Volkswagen Group sold 3.68 million cars in China, accounting for a market-leading 15.7% of sales in the country. Since VW established its first joint venture with SAIC in 1984, the company has sold few diesel vehicles in China. FAW-Volkswagen put out a statement Sept. 24 saying that none of the models being investigated by U.S. authorities have been sold in China.

Diesel plan denied

In 2013, VW raised the idea of introducing new diesel models — of the type involved in the current scandal — to China. “Bosch and VW have lobbied the Chinese government to adopt diesel technology to absorb the extra diesel engine and parts production capacity in the EU, but after this event, diesel will not be an option for future fuel efficiency,” said Zhou Jingzhe, director for China and Korea at IHS Automotive Advisory Service.

“The belief that German cars are the most technologically advanced in the world has been damaged,” said a VW salesperson in Beijing. “We are going to have a hard time from now on.”

FAW-Volkswagen sales tumbled 14% on the year in the year to Aug. 31. “We may well need to re-revise our sales target downward for this year,” said an official at one of VW’s joint ventures.

“I had already decided not to buy [another] Volkswagen before this news,” said Jimmy He, a Chengdu-based businessman who previously bought a VW Tiguan SUV. “Different models of Volkswagens are quite similar in design and are quite ordinary.”

     “The immediate impact [of the rigged emissions tests] on sales in China may be limited, but questions may have been raised in the eyes of consumers with regard to their perception of the trustworthiness of the VW brand,” said Bill Russo, who previously oversaw Chrysler sales in China and is now a managing director at Gao Feng Advisory in Shanghai.

The online buzz has been very critical. “They must be underestimating Chinese consumers,” said one commenter. Said another: “Volkswagen has been my favorite brand of car, but now I’m disappointed. From now on, I’ll buy Chinese or Japanese cars.” Another person wrote, “It turns out that German companies are just as untrustworthy as Chinese companies.”

Under the microscope

Sources at VW’s Chinese joint venture partners say they are already receiving inquiries from government officials regarding emissions and other quality measures. “If they discover any flaws or misconduct at such a global company as VW, it would give them a huge career boost,” said one executive. “Our fear is that those government officials will intensify their scrutiny.”

Another potential threat comes from investigative reports by state-controlled media, such as China Central Television, which in March highlighted a problem with VW’s automatic dual-clutch gearboxes two years ago and other issues regarding the carmaker.

“Of course [the new scandal] will remind Chinese consumers of the [dual-clutch gearbox] and axle problems,” said Jochen Siebert, managing director of JSC Automotive, a China-focused consultancy. “[But] so far, VW has managed to get over these problems, and this time won’t be different. I believe that China and the Chinese have bigger fish to fry and will get on with their lives and other topics, so it will not have a lasting impact in China.”

     But the scandal could trigger a shift in perceptions among Chinese consumers. They have tended to favor German cars, believing them to be better than U.S. and Japanese models. “Due to the arrogance and cheating with diesels, VW is stepping down from the altar,” Zhou said.

VW Emissions Scandal Spreads to Asia as Korea Begins Probe

Bloomberg News, September 22, 2015

Click here to read this article at bloomberg.com

The fallout from Volkswagen AG’s admission that it had cheated on emission tests in the U.S. is spreading to Asia, as South Korea said it will check whether the German automaker complied with its pollution standards.

South Korea will test emissions on diesel versions of VW’s Jetta, Golf, and Audi AG’s A3 sedan in October, Park Pan Kyu, deputy director of the country’s environment ministry, said by phone. The investigation will involve about 4,000 to 5,000 vehicles that were imported to Korea since 2014, Park said.

“We found it necessary to review the emissions of the models under probe in the U.S., although the U.S. has a more rigid emissions standard than Korea does,” Park said. “We have no plans at the moment to expand the investigation to other makers or models but will continue to closely monitor the situation.”

South Korea is reviewing Volkswagen’s compliance after the company admitted to systematically cheating on U.S. air pollution tests, while Germany said it may investigate the matter. Europe’s biggest carmaker derived about 40 percent of its volume sales last year from Asia, home to its largest market China.

“The bigger concern is how it impacts their European reputation, which is much more important market for them, particularly in diesel,” said Janet Lewis, Hong Kong-based analyst at Macquarie Group Ltd. “To the extent that they can’t grow their U.S. business in their quest to be the No. 1 automaker by 2018, they therefore become more reliant on the China market.”

Deliveries of Volkswagen in China fell 5.8 percent in the eight months through August. Industrywide passenger-vehicle sales in the country climbed 6.3 percent in the same period, according to the China Passenger Car Association.

More than 90 percent of about 25,000 vehicles VW sold in South Korea this year through August were diesel models, according to Korea Automobile Importers & Distributors Association data. They included the models under probe in the U.S.

Shares of both Hyundai Motor Co. and its affiliate Kia Motors Corp. rose 3.1 percent in Seoul on Tuesday after brokerages including Samsung Securities Co., IBK Securities Co. and KB Investment & Securities co. said the South Korean carmakers may benefit from VW’s woes.

“It seems inevitable that Volkswagen’s image gets tarnished and sales fall,” Lee Sang Hyun, an analyst at IBK Securities Co. wrote in a report. “We expect Hyundai Motor Group to benefit from VW’s recall.”

In China, VW sells gasoline versions of the models involved in the U.S. probe. The automaker didn’t respond to a request for a breakdown on the diesel models it sells in China or whether the regulators have contacted it about the U.S. admission.

“The way the system works in China is that it triggers a review, when somebody has a problem related to regulatory compliance in one market,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “It raises some question of whether the practices that led to that problem could exist in another market so it could cause other government organizations to take another look and see if in fact they’re complying.”

The General Administration of Quality Supervision, Inspection and Quarantine didn’t immediately reply to a fax seeking comments on whether they will inspect VW. Calls made to the media department of Chinese Ministry of Environmental Protection went unanswered.

New Zealand isn’t aware of any issues with vehicles sold in the country that are compliant with European or Australian standards, Transport Minister Simon Bridges said in an e-mailed response. Australia’s transportation regulator said it’s seeking clarification from Volkswagen as to whether vehicles supplied to the Australian market utilize similar software to that used in the U.S.

There’s no emission issue yet in Malaysia, said Madani Sahari, chief executive officer of Malaysia Automotive Institute. Singapore’s National Environment Agency said it’s working on a response. Taiwan’s air quality regulator said it’s checking with VW’s local agent on imported cars.

The Evolution of Automotive Suppliers

Gao Feng Insights Paper, February 2015

Industry observers tend to overlook the changing role and structure of the automotive supply base. Of course, the story of success in the market is often viewed through the retail sales volume of branded OEM products. However, over the course of several decades, automakers have grown increasingly reliant on an ever smaller number of large tier 1 suppliers to deliver the core technology and innovation needed in the marketplace.

As a result, automakers face new challenges to maintain a balance of power with this new breed of supplier. In addition, suppliers at all tier levels must establish a position of relevance in a supply chain dominated by such power players. And finally, tier 1 suppliers must continue to anticipate the trends and development in the marketplace and upgrade their portfolio of capabilities in order to press their advantage.

In this analysis, we describe the trends, highlight several case examples, and discuss the implications of these developments along four strategic themes.

Thought leadership is core to what Gao Feng does.  We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.

Bill Russo
Managing Director, Gao Feng Advisory Company
bill.russo@gaofengadv.com

Chee-Kiang Lim
Principal, Gao Feng Advisory Company
ck.lim@gaofengadv.com

Tel: +86 10 8557 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)

Gao Feng website: www.gaofengadv.com

Bill Russo to Brief Investors on New Energy Vehicles Market in China

TOPIC:

The Path to Electrification of China’s Automotive Industry

Date: Thursday, February 12, 2015

Time:  10AM EST, 11PM China

Venue:  Conference Call

Click here to register (sponsored by Coleman Research Group)

  • Recent performance of electric vehicles manufacturers in China
  • Tesla’s growth plans and the impact on dealership dynamics
  • Traditional auto ownership model re-shaped by rapid urbanization
  • Disruption of the automotive value chain
  • New mobility concepts changing traditional business models
  • Unique context of China’s urban transportation challenges
  • China’s 12th 5-year plan identified seven strategic emerging industries including electric vehicles, energy efficiency & environmental protection, new generation information technology, bio-technology, high-end equipment manufacturing, alternative energy and new materials
  • Need for OEMs to develop strong relationships with telcos and technology players
  • Companies: Ford (F), General Motors (GM), Volkswagen (VOW), Toyota(TM), Honda (HMC), Fiat Chrysler (FCAU), Nissan (NSANY), Hyundai (HYMTF), Daimler AG (DDAIF), BMW AG (BMW), Continental AG (CON), Valeo (EPA), TRW Automotive (TRW), Mobileye (MBLY), Uber, Yidao, Relay Rides, Baidu (BIDU), Alibaba (BABA) and Google (GOOG)

As the balance of world market and economic power shifts from West to East, China has emerged as the key location in the battle for dominance of the 21st century’s global auto industry. Due to increasing pressure from air pollution, oil consumption and urban congestion, the focus of the country’s auto industry will increasingly switch from internal combustion engine vehicles to alternative propulsion technologies, particularly those powered by electricity. Already many observers believe that the government’s ambitious series of programs and policies designed to accelerate the development of new energy vehicles run over the last decade will lead to the emergence of China as the key location for a global “green” mobility revolution. As this happens, the eventual electrification of the automotive powertrain will transform the automotive industry.
ABOUT OUR EXPERT:

Bill Russo is Managing Director at Gao Feng Advisory Company, Ltd. He has more than 25 years of experience in the industry. He was previously VP of Chrysler Northeast Asia, where he successfully negotiated and secured government approval for six vehicle programs with three different Asian partners. In this time period, he launched a regional holding company as well as two distribution companies and oversaw the industrialization of the first Chrysler and Dodge-branded vehicles in Asia. He holds a U.S. patent for his innovative efforts towards reducing automotive new product development cycle time and is a published author and opinion leader whose viewpoints have appeared throughout several media outlets.

Chinese Electric-Car Maker BYD’s Shares Plunge

The Wall Street Journal
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A BYD Co. electronic vehicle is charged at an EV charging station at the company’s campus in the Pingshan district of Shenzhen, China, Aug. 5, 2014. Bloomberg News
By Colum Murphy

SHANGHAI—An executive at Warren Buffett -backed BYD Co. defended its business prospects after shares in the Chinese electric-car maker fell as much as 47% on Thursday.

In a conference call late Thursday, company secretary Qian Li said BYD’s operations were normal despite the share plunge and sought to dispel what he called rumors about the company. BYD’s Hong Kong-traded shares regained some ground later Thursday and finished at 25.05 Hong Kong dollars (US$3.23), down 29%.

Mr. Li described rumors circulating in the market about BYD—including suggestions that its founder and chairman had been arrested—as “ridiculous” and urged investors to ignore them.

He also dismissed talk of BYD having large exposure to the troubled Russia market, describing the company’s investment in that country as “very small.”

BYD also produces mobile-phone components and solar panels.

Asked whether the price movement could be related to a selloff in shares by Mr. Buffett’s Berkshire Hathaway investment vehicle, Mr. Li said BYD had been in recent contact with Mr. Buffett but there was no sign that Mr. Buffett was considering a sale. He added BYD didn’t reach Mr. Buffett on Thursday due to the time difference between China and the U.S.

Berkshire Hathaway owns a roughly 9% stake in BYD, according to previous company filings, including about one-quarter of its Hong Kong-traded shares. In the Chinese city of Shenzhen, BYD’s shares fell about 10% on Thursday, the daily limit.

In October, BYD reported a third-quarter profit drop of 26% and said it expects this year’s profit to fall by up to 22%. Auto-sales growth in China has slowed in recent months amid a broader drop in China’s economic momentum.

Overall in the first 11 months of 2014, BYD has sold 384,977 vehicles, down from 458,042 vehicles sold in the same period the year before—a 16% drop, according to data from research firm IHS Automotive.

While the company frequently touts its line of electric vehicles and plug-in hybrids—vehicles that can run on both gasoline and electricity—it relies heavily on sales of traditional gasoline engine cars for the lion’s share of its automotive revenue.

Bill Russo, managing director of consulting firm Gao Feng Advisory, said BYD, like many other Chinese car brands, need to create a brand that appeals to Chinese consumers. “It has to go beyond just being a cheap car,” he said.

Mr. Li said BYD faces “hot competition” and decreasing margins in the traditional car market in China but said it was transforming into a manufacturer of new-energy vehicles.

China has a long-stated goal of reducing its dependency on imported oil by promoting new-energy vehicles, including passenger cars and buses. China wants half a million such vehicles on the road by next year and 10 times that by the end of the decade.

But in the first nine months of this year, fewer than 40,000 electric vehicles were sold in China, according to data from the government-backed China Association of Automobile Manufacturers. Around three quarters of these were passenger cars. By comparison, around 14.2 million conventional passenger cars were sold in the period.

IHS Automotive researcher Namrita Chow said the high cost of replacing batteries, lack of adequate charging infrastructure and range anxiety—where buyers worry about how far they can travel on a single charge—are all obstacles in the path to high sales growth rates.

She said that BYD had doubled sales of its pure electric e6 car to 2,203 vehicles in the first 10 months of this year compared with the same period last year. Sales for the hybrid Qin had so far reached just over 11,000 vehicles in its first year on sale.

Mr. Li dismissed talk that the Chinese government could be reducing its support of new-energy vehicles, including buses, saying BYD continued to see good order flow for them. “We’re confident on the future of electric buses,” Mr. Li said.

A nearly 50% drop in oil prices over the past six months has pressured green stocks in a number of areas.

“With the oil price down, the global outlook for electric vehicles looks very different from just a couple of months ago,” said Jochen Siebert, a Shanghai-based managing director at JSC Automotive Consulting. “BYD’s electric and hybrid car business will likely be impacted,” he added.

Write to Colum Murphy at colum.murphy@wsj.com