China’s Answer to Tesla Is Hopeful Entrant to Global Car Market

The New York Times, January 26, 2017

Lu Qun, chairman of Qiantu Motor, in Beijing in December.

by Michael Schuman

BEIJING — On a windswept lot near Beijing’s main airport, Lu Qun talks up the electric sports car he hopes will transform him into China’s Elon Musk.

“This is a real performance car,” the entrepreneur boasted of his sleek, gray-and-black Qiantu K50. “It’s fun. You can feel the quality. You’ll love driving this car.”

For Mr. Lu, 48, the roadster is his best chance to make it big. After a lifetime of obscurity creating vehicles for other companies, the bespectacled engineer is betting that the rise of electric cars will propel his company — and his country — into the automotive spotlight.

“Traditional auto manufacturers are constrained by their old models,” he said. “We can see things with fresh eyes.”

Across China, government officials, corporate executives, private investors and newcomers like Mr. Lu are in a headlong rush to develop a domestic electric car industry. The country’s goal, like Mr. Lu’s, is to capitalize on the transition to electric to turbocharge the country’s lagging automobile sector to become a major competitor to the United States, Japan and Germany.

That has been a goal of China’s industrial planners for decades, as the government has lavished resources on building homegrown automakers and discriminated against foreign players.

But so far, that effort has failed.

Local manufacturers have lacked the brands, technology and managerial heft to outmaneuver their established rivals, either at home or abroad. Chinese consumers have preferred more reliable Buicks, Volkswagens and Toyotas to the often substandard offerings from domestic manufacturers, while little-known Chinese models have struggled to gain traction overseas.

Electric vehicles could offer a second chance — one China’s policy makers do not intend to miss.

They targeted electric cars for special support in an industrial policy called “Made in China 2025,” which aims to foster upgraded, technologically advanced manufacturing. By 2020, Beijing expects its automakers to be able to churn out two million electric and hybrid vehicles annually — six times the number produced in 2015.

This time, China’s carmakers may be better positioned. Since electric vehicles are a relatively new business for all players, Chinese manufacturers and international rivals are largely starting from the same point.

“There is a smaller gap between where China is today and the rest of the world” in electric cars, said Bill Russo, managing director at Gao Feng Advisory, a Shanghai consultancy, and a former Chrysler executive. “There is room for newer start-up companies to dream big in China.”

Mr. Lu is one of those dreamers.

Fascinated by cars since he was a boy, he studied automotive engineering at Beijing’s prestigious Tsinghua University. Upon graduating in 1990, he joined the research and development team at the China-based joint venture of Jeep, then a division of Chrysler.

During his time there, which included two years in Detroit, Mr. Lu came to feel such overseas operations had limited prospects in China — the ventures’ partners would try to balance their interests, and so were slow to develop strategies and make decisions.

So in 2003, he and nine colleagues started CH-Auto Technology Corporation as a specialty research and design shop for the local car industry. Since then, the firm has designed vehicles for some of China’s biggest automakers.

Mr. Lu decided to start manufacturing his own vehicles because of the shift to electric. Since producing electric cars requires new parts and technologies, he believed a small entrant could better compete with these new vehicles than traditional automakers.

“Electric vehicles won’t just replace cars with conventional engines, but they will bring a huge change to the entire car industry,” Mr. Lu said. “We wanted to be part of this revolution.”

The result is the K50. Designed at his research center, the two-seater has a light, carbon fiber exterior and a console stuffed with touch screens. Rows of batteries propel the roadster to a top speed of about 120 miles per hour and carry it as far as 200 miles on a single charge.

No longer content to watch others produce his designs, Mr. Lu is currently constructing a $300 million factory in Suzhou, a city near Shanghai, to manufacture 50,000 cars a year. In all, he expects to invest as much as $1.4 billion into his venture over five years.

He did not specify what the car would sell for, but Mr. Lu intends to price the K50 at the top of the market when it goes on sale this year.

That sets CH-Auto on a collision course with the industry’s flagship: Tesla.

Elon Musk’s company already has an edge. While Mr. Lu is building his business from scratch, Tesla has been established in China since 2013. CH-Auto will have to persuade wealthy customers to plunk down a large sum on an unfamiliar brand — Qiantu — over Mr. Musk’s recognizable models.

Mr. Lu nevertheless remains confident. He argues the sporty K50 will appeal to a more leisure-oriented driver than Tesla’s cars. As a logo, the company has chosen the dragonfly, because its managers believe the speedy, nimble insect has similar attributes to his electric car. To market it, Mr. Lu is considering opening showrooms in major Chinese cities, backed by a platform to sell online.

Elon Musk “is someone I can learn from,” he said. “Tesla has huge symbolic significance because it is the first company to make people believe a business model solely around electric vehicles is possible.”

But, he added, “we are not looking to create the Chinese Tesla.”

When it comes to competing with Tesla, Mr. Lu can count on ample help from the Chinese government.

To bring down costs and spur demand, the state has unleashed a torrent of cash. It has offered subsidies to manufacturers and tax breaks for buyers, and plowed investments into charging stations to make electric cars more practical.

In all, UBS Securities estimates that the government spent $13 billion promoting electric vehicles in 2015 alone. So far, Mr. Lu has financed the K50 through loans and injections of fresh capital, but says he “won’t refuse” government subsidies if they become available.

Some analysts fear the state’s largess could prove as much bane as boon.

China may be recreating the waste and excess in electric cars that has plagued other state-targeted sectors, like steel and renewable energy, without spurring the technological innovation the economy needs to compete. And even though China’s car market is the world’s biggest, it is still unlikely to absorb all of the electric vehicle projects underway today.

“They are fueling overcapacity, with a lot of wasted money, and I’m doubtful that in the end you’ll have a successful electric car industry,” says Crystal Chang, a lecturer at the University of California, Berkeley who studies China’s auto industry policies.

Significant sums have already been squandered. In September, the Finance Ministry fined five companies for defrauding the government of $150 million by fabricating sales of electric vehicles to obtain more subsidies, and several companies have failed to make an impression.

Mr. Lu is certain, however, that the K50 stands out in a crowded field. The car has already gotten some advance buzz; a review on one popular Chinese website praised its design as “beautiful” and “avant-garde” and its body as “very muscular.”

“A big advantage they have is their knowledge of what it takes to build a quality vehicle,” said Jack Perkowski, managing partner of the Beijing-based consulting firm JFP Holdings and a veteran of China’s car sector. “They have a better chance than many others because of that.”

Mr. Lu is counting on it.

“There are a lot of electric vehicle companies and hot projects attracting a lot of money,” he said. “Not every company and not every car will be successful.”

China pushes for homegrown driverless cars

The Detroit News, January 7, 2017

Baidu Inc. and state-owned Beijing Automotive Group Co.’s collaboration on telematics and autonomous driving is almost ready for its coming-out moment, as industry and government join hands for a self-driving vehicle push within China.

A BAIC-built model equipped with Baidu tech will debut in April at the Shanghai auto show, BAIC Chairman Xu Heyi said in interview Friday at the trade show CES 2017 in Las Vegas. The two companies also plan to conduct road testing of a car that will be autonomous in limited environments by the end of this year.

China has set a goal for 10 percent to 20 percent of vehicles to be highly autonomous by 2025 in the world’s biggest auto market, and for 10 percent of cars to be fully self-driving in 2030. State broadcaster China Central Television began airing a five-part series this month on one of its prime time programs to highlight the country’s efforts in autonomous vehicles and related technology.

“It’s a smart move for both to team up,”said Bill Russo, managing director of Gao Feng Advisory Co. “BAIC can bring manufacturing and Baidu can bring technology capability to solve mobility problems.”

The cooperation with BAIC is Baidu’s most comprehensive, though the internet giant also is working with other automakers on joint development of self-driving cars, Baidu President Zhang Yaqin said Friday. The Beijing-based company is close to setting up a new research center near Seattle that will focus on artificial intelligence and cloud computing and security, he said.

Baidu formed a self-driving car team in Silicon Valley in April that it said would employ more than 100 researchers and engineers by the end of last year. It’s partnered with chip maker Nvidia Corp., has been testing its autonomous vehicles in eastern Chinese cities including Wuhu and Shanghai and earned a permit from California to test in the state last year.

BAIC, owned by the local government of Beijing, has made progress of its own. The automaker whose joint-venture partners include Daimler AG and Hyundai Motor Co. in April let customers ride in self-driving cars on a test track.

China is seeking to shed its image as a cheap manufacturer of products with little value-added content. The government is pushing its technology and manufacturing industries to create more sophisticated products and services in line with the global trend toward digitization and internet connectivity.

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net.

Click here to read this story at detroitnews.com

 

Reimagining Mobility in the China Context

Gao Feng Insights Report, February 2016

We are pleased to share with you our paper titled: Reimagining Mobility in the China Context. This article builds on the themes from our previous article titled Digital Disruption in China’s Automotive Industry, and offers a perspective at how the traditional value chain of the automotive industry is being fundamentally transformed by a new wave of “digital disruptors”.

Unlike traditional automotive OEMs and suppliers, these digital disruptors are leveraging mobile internet technology to present new and innovative “Connected Mobility” services to users, and in the process challenging the business model of the automotive industry. The century old hardware-centric business model of individual car ownership and product-based segmentation is transforming into a new form which leverages internet technology to deliver a broader range of services to address mobility needs.  Such changes are happening faster in China than in the rest of the world, where the size and scale of the urban population and the sheer numbers of mobile internet users are much greater than other markets.

In such an environment, China’s Internet giants (Baidu, Alibaba, Tencent) along with mobility disruptors such as LeEco and NextEV are vying to deliver an increasingly connected, electrified, smart and personalized mobility experience.  Coupled with the Chinese government’s regulatory push on new-energy vehicle adoption and sustainable transportation infrastructure, China has demonstrated strong potential to become the breeding ground for the Connected Mobility revolution.   As a result, Automotive OEM and supplier CEOs must learn to reimagine mobility in the China context in order to secure a strong position in this new competitive landscape.

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

Edward Tse
Chairman and CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com

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

Digital Disruption in China’s Automotive Industry

Gao Feng Insights Report, January 2016

We are pleased to share with you our paper titled: Digital Disruption in China’s Automotive Industry. Recent advances in mobile connectivity, big data and social networks have infiltrated the traditional automotive industry and are beginning to redraw the competitive landscape among traditional hardware companies and digital “disruptors”.

The traditional automotive industry, where technology innovation has primarily been focused on powertrain and safety systems, must now contend with new forms of mobility services that are transforming the business model of the auto industry. The conventional hardware-centric, sales-driven, asset-heavy, and ownership-based business model with sporadic customer interactions is being superseded by more connected, on-demand, cost-effective, personalized mobility services. This new form of “connected mobility” is driving new technologies in the areas of navigation, analytics, driver safety, driver assistance and information virtualization.

China’s automotive industry is at the forefront of digital disruption as this transformation is happening much faster in China than the rest of the world, and China will leapfrog to a new era of personalized and electrified mobility.  The unique context of China’s urban transportation challenge, the high rate of adoption of mobile device connectivity, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts will compress the time needed to commercialize smart, connected car technology and related services.  These conditions may permit China to “leapfrog” to towards a new era of personalized and electrified mobility.

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

Edward Tse
Chairman and CEO, Gao Feng Advisory Company
edward.tse@gaofengadv.com

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

China Seen Laying Down $15 Billion Bet on Electric Vehicles

Bloomberg News, December 16, 2015

China to be `epicenter of electrification,’ analyst says

BYD, Zotye among biggest sellers of electric cars in China

China has found electric cars a tough sell even after lavishing consumers with subsidies and privileges. After almost certainly failing to meet a target to have half a million of such vehicles on its roads by year end, its next act is to achieve a 10-fold increase by the end of the decade.

The electric vehicles in service will fall about 26 percent short of its year-end target, according to estimates from the science ministry and state-backed auto association. To meet its 2020 goal of five million EVs, the government will speed up the construction of charging stations, reducing a major inconvenience for urban residents who don’t have personal garages to charge their cars.

“China will be the epicenter for electrification of the auto industry globally,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co., who estimates that China would have invested 100 billion yuan ($15.5 billion) by 2020 on new-energy vehicles.

President Xi Jinping has designated electric vehicles as a strategic initiative in a bid to upgrade the auto industry and create challengers to Toyota Motor Corp. and General Motors Co. The government is increasing spending after signs that the combination of research grants, consumer subsidies and infrastructure investments is starting to yield results. New-energy vehicle production surged fourfold to 279,200 units in the first 11 months, even as oil traded near levels last seen during the global financial crisis.

Local Winners

That has benefited automakers like BYD Co., Zoyte Auto and BAIC Motor Corp., which have led sales of electric cars. BYD, backed by Warren Buffett’s Berkshire Hathaway Inc., would have turned a loss in 2014 and this year if not for EV subsidies from the central government, according to Barclays Plc. Geely Automobile Holdings Ltd. said last month that it would target new-energy vehicles to make up 90 percent of sales by 2020.

The government incentives have lured consumers like Zhang Peng, 30, who decided to buy BAIC’s EV200 electric car after trying without success for two years to win a license plate in the bimonthly lottery held by the Beijing government. EVs are exempt from the ballot, which has worse odds than roulette.

Zhang also received 90,000 yuan in matching grants from the central and local governments, or almost half of the 208,922 yuan sticker price for BAIC’s EV200 electric car. The model costs about 7.5 yuan to run every 100 kilometers (62 miles), compared with an estimated 39 yuan for an equivalent gasoline-powered 1.6-liter Toyota Corolla, according to calculations based on the published fuel-economy rating and Beijing pump prices.

Battery Suppliers

The burgeoning demand has also helped battery suppliers such as South Korea’s Samsung SDI Co. and LG Chem Ltd., which supplies SAIC Motor Corp. and Chongqing Changan Automobile Co. Panasonic Corp. said it is considering building a car-battery factory in China to supply lithium-ion batteries.

Among local component makers, Wanxiang Qianchao Co. and Hunan Corun New Energy Co. have more than doubled in Shanghai trading this year as investors bet the surge in electric vehicle demand will boost demand. BYD has climbed 34 percent this year and Geely Automobile has surged 79 percent in Hong Kong trading, compared with the 8.4 percent decline in the benchmark Hang Seng Index.

Global automakers are beginning to get into the act. Volkswagen AG, the largest foreign carmaker by sales, has said it will introduce 15 locally produced new-energy vehicles in the next three to five years in the country. Ford Motor Co. said this month it’s investing $4.5 billion globally in electrified vehicles.

‘Foreigners Coming’

“In the initial stage it was mainly local automakers competing with each other in the electric-car segment, but now the foreign players are coming,” said Ouyang Minggao, director of the Tsinghua New Energy Vehicle Center. “All kinds of electric cars will be here soon, including plug-in hybrids, which will lead to very big challenges to local automakers.”

The Chinese government is not alone in setting aggressive targets for alternative-energy transportation. President Barack Obama in 2011 called for one million electrified vehicles in the U.S. by 2015, a target that the administration scaled back in March after low gasoline prices reduced the cost advantage of plug-in and hybrid vehicles.

China, though, has stood out in terms of the scale of the state’s financial support. The country has invested about 37 billion yuan into the new-energy vehicle segment over the past five years, according to Gao Feng’s Russo, who estimates the government will devote another 63 billion yuan by 2020.

Funding Plan

The central government released a plan on Wednesday detailing funding for local governments to construct charging facilities, tied to the number of new-energy vehicles they sell.

Automakers will have to play by China’s rules if they want a piece of the market, even if they don’t believe in electric cars. The government has mandated the lowering of average fuel consumption to 5 liters by 2020, from 6.9 liters per 100 km this year.

“There is really no choice for the automakers, if they are required to meet the more stringent emission standards by 2020,” said Steve Man, an analyst with Bloomberg Intelligence. “Other technologies with the stringent emission standards won’t get you all the way to target.”

China car market braced for abnormal era of flat sales

The Financial Times, July 27, 2015

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.03.00 PM

On the eve of China’s largest car show in April, executives and analysts braced themselves for a “new normal”: single-digit sales growth after two fat years. Yet some are beginning to wonder if the world’s largest car market is actually entering an abnormal era of flat or even falling sales.

The catalyst for this pessimism was a sharp fall-off in year-on-year sales — 9.4 per cent higher in March, but 3.4 per cent lower by June than the same month last year, according to wholesale figures compiled by the China Association of Automobile Manufacturers. It was the industry’s first decline since early 2013.

Coupled with an economy growing at its slowest annual rate in 25 years and the recent crisis in China’s stock markets, the outlook appears bleak for an industry that has been a cash cow for mass market and premium car brands for the past five years.

“It will be quite challenging for carmakers because the market is cooling and the trend will not be reversed anytime soon,” says Teng Bingsheng, a professor at the Cheung Kong Graduate School of Business in Beijing.

Analysts at Barclays recently revised their 2015 outlook for passenger car sales growth sharply downward, from 8.5 per cent to 1.7 per cent.

Bernstein Research warned that “we’ll need a stronger word than ‘moderation’ to describe the industry’s challenges”.

Marques as diverse as BMW and Volkswagen have reported falling sales. VW experienced a 3.9 per cent fall in first-half group sales to 1.7m units — the first decline in nine years. BMW also caved in to dealer demands for bigger subsidies — a concession since made by others — while its Chinese joint venture partner issued a profit warning on July 13.

For VW, the pain is exacerbated by having just one mass-market SUV on offer in China at a time when the fast-growing segment accounts for one-third of all passenger car sales.

“That’s clearly been a huge miss on their part,” says Janet Lewis, analyst at Macquarie in Hong Kong. “A lot of first-time buyers are in central and western China where road quality is not as good and there’s more focus on the higher ride that you get with an SUV.”

GM, however, bucked the trend with a 2.6 per cent rise in first-half China sales, helping to send its shares up more than 4 per cent after it reported second-quarter earnings on Thursday.

The US automaker bolstered the view of analysts who say China’s car industry is simply maturing, with growth shifting to smaller cities in the country’s vast interior and increasingly driven by new model launches. The market is merely becoming more competitive with lower profit margins, more in line with those in the US and Europe.

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.04.46 PM

“It’s easy to be pessimistic when you start to see some year-on-year developments that are negative,” says Bill Russo, a Shanghai-based consultant who notes that car sales also grew less than 5 per cent in China in 2011 and 2012. “But we went through a softening a few years back and I remember having similar conversations about whether this was the big down cycle. It wasn’t.”

“Supply has caught up to demand,” he adds. “[Companies] are going to be giving away some of those very good margins they have enjoyed for quite a long time.”

That may squeeze shareholder payouts too. VW, for example, has seen an almost eightfold increase in the annual dividend it receives from its China joint ventures over the past five years, from €400m in 2009 to €3bn last year

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.06.25 PM

Mr Russo’s less gloomy big picture is also supported by basic demographics, with only 52 passenger vehicles per 1,000 people compared with a global average of 150.

Incomes are improving too. According to GaveKal Dragonomics, a Beijing consultancy, the annual income of some 15m Chinese households will exceed $20,500 this year for the first time. Another 19m households will break through the $13,500 level.

As a result, Macquarie has adjusted its 2015 China car sales forecast only moderately, projecting an increase of 10 per cent from 7 per cent previously, and thinks the overall market will grow from 19.7m units last year to at least 32m by 2020.

But as competition intensifies, the biggest rewards will flow to the most cost-efficient carmakers with the quickest model cycles — just as they do in other markets. “It’s harder to sell something that’s older in China, particularly if people know the next model is coming,” says Ms Lewis.

Chinese brands regain market share
July began as June ended for the likes of BMW and Volkswagen, according to analysts at Bernstein Research, with falling year-on-year sales for the two German groups as well as General Motors and Ford’s China joint ventures.

Unexpectedly, traditional laggards including Mercedes-Benz and Japan’s ‘big three’ automakers have been reclaiming market share.

Chinese brands have also seen their share of total sales — currently 41.5 per cent — start to grow again after four consecutive annual declines.

BAIC Motor, Daimler’s main China joint venture partner, is planning on a 29 per cent increase in sales of its own brand cars this year, to 400,000 units. “Our domestic brand business is growing substantially and has exceeded our expectations,” Xu Heyi, BAIC chairman, said last week.

In one sense, Chinese brands simply endured their “correction” a year early, after experiencing steep year-on-year declines in 2014. Like the Japanese companies, whose sales were affected by spats between Beijing and Tokyo in 2012 and 2013, they are improving from a low base.

Mercedes, meanwhile, is reaping the fruits of a restructuring begun two years ago by Hubertus Troska, the China head of its Daimler parent unit, as it begins to catch up with traditional leaders Audi and BMW. Mr Troska’s changes unified a fragmented sales and marketing structure, bringing together separate channels for imported and domestically produced vehicles.

On Thursday, Daimler reported better than expected second-quarter results with an underlying margin of 10.7 per cent. “Mercedes now looks to be the most profitable of the ‘big three’ German premium brands, something inconceivable a few years ago,” said Bernstein’s Max Warburton in a research note. “Daimler management . . . must feel vindicated and delighted.”

Mercedes is also benefiting from a series of new product launches at a time when refreshing the model line-up is becoming essential in the world’s largest car market.

Macquarie’s Ms Lewis says the German company is in “about the sixth inning” of a strong new product cycle in China, with new GLC SUV and E-class sedans in its pipeline.

“Products tend to have a very short life cycle in China,” adds Mr Russo. “If it didn’t launch in the past 18 months, it’s unlikely to be hot. You’ve got to rake it in while you can.”

Additional reporting by Wan Li

Click here to read this at FT.com