Bill Russo, Managing Director of Gao Feng Advisory Company, describes the disruptive developments happening in the automotive industry as it transforms from “automotive” product manufacturing and sales towards “automobility” digitally-enabled solutions.
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.”
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)
SHANGHAI- Unable to afford a car, Shanghai university student Long Yi endured an expensive taxi commute across his vast city until he started using one of the car-sharing schemes quickly gaining momentum in China.
Essentially an Internet Age twist on car rentals, car-sharing is attracting Chinese millennials who increasingly demand mobility but shun the burden of auto ownership.
Long, 20, drives himself to school for around 50 yuan ($7) using EVCARD, a service launched by state-owned automaker SAIC Motor that has compact electric vehicles sprinkled around the city, slashing his travel time and costing one-quarter the taxi fare.
“It is cheaper and more convenient and very flexible. I’ll choose EVCARD as my primary mode of transport almost every time,” said Long.
After years of skyrocketing China sales, the global auto industry is contemplating slower growth as it convenes this week for the Shanghai Auto Show, putting alternative sales channels like car-sharing in focus.
Long-established in Western countries, such services only began appearing in China in the past two years, but are part of an ongoing Chinese personal-mobility revolution.
Already bike-sharing businesses have exploded across China, flooding major cities with bicycles that are unlocked by GPS using an app, can be left anywhere and have become critical to countless commutes.
Similarly, drivers typically use a smartphone app to find and unlock shared cars, later parking them anywhere or at set locations.
Dozens of Chinese and foreign companies have now either launched or invested in car-sharing operations, with some making purpose-built cars.
Germany-based consultancy Roland Berger forecasts annual market growth of at least 45 percent.
“That is a significant growth opportunity (for manufacturers). There are only a few hundred thousand cars now, but it’s growing and it’s growing very quickly,” said Johan Karlberg, a Shanghai-based partner with Roland Berger.
– Driving new sales –
German giant Daimler launched a car-sharing service last year that has since expanded to seven cities, gaining more than 250,000 registered users, the company said.
Jochem Heizmann, China CEO for Volkswagen, the country’s top car brand, told reporters in Shanghai VW would partner with Chinese car-sharing operator Shouqi in multiple cities, partly to boost electric-vehicle sales.
“You have to see the development of such fleets as sales channels,” he stressed.
Lynk & Co — a new unit of Chinese automaker Geely, which owns Volvo — unveiled in Shanghai two SUVs with built-in touch-screen sharing software developed with Microsoft and Sweden’s Ericsson.
“Communities”, such as companies or residential developments, can jointly purchase vehicles to share, or owners can share their car for a fee with other drivers who join Lynk & Co’s network, said Alain Visser, the company’s senior vice president.
“It becomes an interesting concept because sharing can reduce the cost of ownership,” he told AFP.
Lynk & Co also is partnering with TripAdvisor and Tujia — China’s Airbnb — on a proposed system combining shared accommodation and cars.
“Instead of entering the (car-sharing) market once it becomes big, we want to make it big,” Visser said.
Bill Russo, head of Shanghai-based auto consultancy Gao Feng, said such services will guide auto manufacturing in future.
“You may build them to entertain people in the backseat, or to provide more connectivity so people can be productive. We’ll see this segment influence specifications,” he said.
China’s central government and many local authorities are keen to reduce congestion and air pollution and have dangled various incentives for car-sharing, such as eased licensing requirements and guaranteed parking.
Further supporting car-sharing’s potential, countless Chinese face significant car-ownership hurdles, including cost, scarce parking and limits on car use in several major cities.
By 2020, China will have just 195 million cars for 355 million licensed drivers, Roland Berger estimates.
“Many middle-class families that can afford a second car are opting not to. It’s a real hassle,” said Karlberg.
High start-up costs and other hurdles in the fledgling car-share industry mean no one is making money yet, analysts say.
But they expect the growing numbers of industry entrants soon to consolidate into a solid few able to run sustainable businesses, perhaps in partnership with government.
The U.S. auto maker plans to build the Mondeo Energi plug-in hybrid and a new all-electric SUV in China
Ford Motor will start manufacturing electric vehicles in China next year. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
By TREFOR MOSS
SHANGHAI— Ford MotorCo.F -0.35% said Thursday that it would start building electric cars in China to tap into a state-sponsored boom in green-energy vehicles.
In doing so, the Detroit-based company signaled that it had swallowed industry concerns about bringing proprietary electric-car technology to China, despite misgivings among foreign auto makers about intellectual-property protection in the world’s largest auto market.
“It’s manifest destiny” for foreign car makers to get past those fears and start building electric cars in China, said Bill Russo, managing director of Gao Feng Advisory, a Shanghai consulting firm.
Mass uptake of electric vehicles is set to happen in China first, he said, “and none of those companies can afford not to be relevant to the future of their industry.”
Ford’s local joint venture Changan Ford Automobile Co. will start building the Mondeo Energi plug-in hybrid vehicle in China next year, with a new all-electric sport-utility vehicle set to follow within five years, the company said in a statement.
Electric powertrains will be manufactured locally by 2020, and by 2025 all of Changan Ford’s vehicles will come in electrified versions, it said.
“The time is right for Ford to expand our EV lineup and investments in China,” said Chief Executive Mark Fields.
China is already the world’s largest market for electric vehicles, with over half a million electric or hybrid cars sold there last year, according to the China Association of Automobile Manufacturers.
The government is encouraging their uptake by heavily subsidizing electric cars through payments to manufacturers, which are then able to sell EVs more cheaply. It is also far easier to obtain a license plate for an EV than for a traditional gasoline car in congested cities like Beijing and Shanghai.
Local authorities have also set ambitious targets for electrifying bus and taxi fleets over the next few years, and for the rollout of EV charging facilities.
There could be as many as 32 million new energy vehicles in China by 2025, according to Gao Feng Advisory—a total that is likely to be a substantial share of the global fleet, with uptake of EVs in the U.S. and Europe happening more slowly.
Yet while most gasoline cars sold in China are built by foreign auto makers operating through local joint ventures, almost all of the electric cars sold in China last year were made by Chinese companies operating without foreign input.
Silicon Valley electric-car maker TeslaInc. was the one notable exception: Without disclosing how many cars it had sold, the company said in a March 1 filing that its 2016 revenue topped $1 billion in China for the first time last year, leading auto-industry analysts to estimate China sales of around 11,000 imported vehicles. Chinese tech company Tencent HoldingsLtd. last week revealed it had taken a 5% stake in Tesla.
But Tesla, like most other foreign auto makers, has so far held back from building EVs in China. Beijing had sought to spur EV manufacturing by telling auto makers that a certain proportion of the cars they build in China would have to be electric in the near future, although officials have recently signaled that those moves may be delayed amid complaints from the industry and from foreign governments.
Imported cars incur a 25% tariff, making them less competitive, and so auto makers naturally want to build in China, said Michael Dunne of Hong Kong-based Dunne Automotive. But they have been holding out for some relaxation of China’s strict joint-venture rules before committing to large-scale EV manufacturing in China, he said.
Foreign car makers and the Chinese authorities have been “sitting around the poker table”, said Mr. Dunne.
It’s the foreign car makers who appear to have blinked.
In March, Buick, a unit of General MotorsCo. , announced plans to start building plug-in hybrid and electric vehicles in China. Last year, GM said it wanted to have 10 new energy vehicles in China by 2020, though it has yet to reveal any plans to start manufacturing its highest-profile EV, the Chevrolet Bolt, in the country.
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.”
At a media event on Tuesday ahead of this week’s CES 2017 conference, the Los Angeles-area company showed a four-door, sports-utility-like vehicle called the FF 91 that executives claim can go from zero to 60 miles an hour in 2.39 seconds, faster than the Tesla Model S.
Faraday’s car has cushy back seats that can recline like a La-Z-Boy chair and an interior cabin loaded with large video screens that can be updated with next-generation gadgets. Faraday hasn’t disclosed a starting price.
“I’m hoping…to convince people that we’re real,” said Nick Sampson, Faraday’s senior vice president of engineering and research and development. “We are doing a real product, it’s not just a vaporware, Batmobile to create attention.”
Mr. Sampson said the company plans to roll out the FF 91 in 2018, but he wouldn’t discuss Faraday’s financial status.
That question arose in November when Faraday’s main investor, Chinese billionaire Jia Yueting, disclosed a cash crunch at LeEco Holdings. Mr. Jia, founder of LeEco, told employees the company had expanded too quickly as part of a multibillion-dollar spending spree to build a conglomerate ranging from smartphones to electric cars and a film studio.
LeEco’s precarious cash situation has had “some impact” on Faraday, Mr. Sampson said, but he stressed the companies are separately run.
In late December, Mr. Sampson spent more than three hours showing reporters around the company’s headquarters, a former Nissan Motors Co. facility in Gardena, Calif. The former Tesla executive led a tour through various departments, including aerodynamics, body engineering and manufacturing, as many executives presented using large LeEco TVs and talked optimistically about being ready to begin production.
Notably absent was Marco Mattiacci, global chief brand and commercial officer, whose name was printed on the agenda. He quit a few days later, according to people familiar with the matter.
Mr. Mattiacci formerly headed Ferrari in North America and was one of eight senior executives who left in the past year, according to one of the people.
Some of Faraday’s Western executives, hired from high-profile auto makers, have disagreed with their Chinese counterparts over the direction of Faraday, according to people familiar with the matter.
Underscoring how important Faraday views the CES reveal, a giant TV screen in the company’s lobby near the boardroom displays a clock counting down the hours until the event. “While getting a PR event right would be a step in the right direction, it’s still not clear whether they can raise the funds needed to finish the journey,” Bill Russo, an automotive consultant for Gao Feng Advisory Co. in Shanghai, said.
Faraday joins a crowded field of startups that aim to follow the same path as Tesla. Silicon Valley automotive startup Lucid Motors last month revealed the production version of its electric sedan that will cost about $160,000 for early versions, with the expected starting price to drop to around $65,000.
The sales pitch for the Lucid car is similar to Faraday’s: promises of sports-car-like abilities, luxurious interiors and eventual self-driving capabilities. The companies also share Mr. Jia as an investor, though he isn’t a majority shareholder in Lucid.
During the recent Faraday tour, an executive demonstrated the car’s self-parking feature. While reporters were allowed rides in prototypes to demonstrate acceleration and handling, they weren’t given up-close demonstrations of the autonomous feature.
Instead, they watched from across the parking lot as the vehicle’s operator kept his left hand hanging out the window as the car approached an open spot and backed into it. Asked if reporters could see up-close how it worked, a spokesman said, “Maybe later.”
At the event Tuesday, after showing a video of the self-parking, Mr. Jia surprised the audience by popping out of the car after driving on stage.
He pushed a button to activate the self-parking feature. But it didn’t work.
“It’s a little bit lazy tonight,” Mr. Sampson said.
Moments later they tried it again with success. The company then said it will begin taking $5,000 deposits.
The German car maker signed a memorandum of cooperation with China Anhui Jianghuai Automobile Co. for a potential partnership, the companies said in separate statements. Jianghuai said the two will be equal owners of the joint venture, and hope to reach a formal agreement within five months.
“As we aim to be at the forefront of e-mobility, Volkswagen Group is looking forward to explore all options to set up a close and mutually beneficial partnership with JAC,” said Volkswagen CEO Matthias Müller. The company is targeting sales of a million electric vehicles a year world-wide by 2025.
Volkswagen, which derives more than a third of its global vehicle sales from China after three decades of operations there, currently has two car-making partners in the country: SAIC Motor Corp. in Shanghai and FAW Group Corp. in the northeast. Under government rules, foreign car makers must tie up with local partners to produce cars.
China limits foreign auto companies to two local partners to make gasoline-powered vehicles. While the limit doesn’t apply to electric cars, most foreign companies choose to produce alternative-energy vehicles with their existing partners. Officials at SAIC and FAW didn’t respond to requests for comment. Analysts say Volkswagen may be able to strike a more favorable deal with Jianghuai than its current partners.
“You may get a better agreement from a company who values your technology more. SAIC and FAW may already have [electric-vehicle] technologies and do not need VW as much as JAC,” said Bill Russo, a Shanghai-based managing director at consultancy Gao Feng Advisory Co.
General Motors Co. plans to launch about 10 alternative-energy cars with its Chinese partners, SAIC and Wuling, by 2020. Nissan Motor Co. and its partner, Dongfeng Motor Corp., launched an all-electric car in China in 2014.
Wednesday’s disclosure follows Volkswagen’s purchase of a 16.6% stake in U.S.-based heavy truck maker Navistar International Corp. this week. Jianghuai, of Hefei in east China’s Anhui province, is a major truck maker in China. It also builds conventional and electric cars. Earlier this year, Jianghuai signed a 10 billion yuan ($1.5 billion) agreement with NextEV Inc., an electric-car startup backed by Tencent Holdings Ltd. and Sequoia Capital, to develop electric vehicles.
China is going all in on alternative-energy vehicles, as it seeks to cut dependence on oil imports and reduce air pollution. Beijing also regards electric cars as a shortcut for its companies to reach the forefront of an evolving global auto industry.
Chinese governments at all levels last year spent a total of 90 billion yuan ($14 billion) in the sector, including direct cash subsidies for electric-vehicle makers and construction of public charging stations, says UBS Securities.
Sales of electric and hybrid cars and buses quadrupled in 2015 from the previous year to 331,000 vehicles. In the first seven months of this year, sales of such vehicles rose 23% to 207,000 units.
Volkswagen’s current strategy review calls for accelerating development of electric vehicles. Over the next decade, Volkswagen plans to develop around 30 new battery electric-car models, which could account for as much as 25% of the car maker’s total sales.
As the development of automotive electronics and telematics is gaining speed, intelligent car applications are gradually and successfully integrated in our daily lives.
The numerous advantages of latest technologies do not only include an improved driving experience or enhanced safety, but also the evolution towards less fuel consumption and more sustainable driving.
Therefore, the September Automotive Roundtable in Shanghai will discuss promising trends of future cars in China and its latest applications in several areas, such as Driver Assistance Systems, Autonomous Driving, Automotive Multimedia & Communication, Connected Vehicles and Online Services in China.
By Mr. Roger Looney, VP of Vehicle Engineering – Vehicle Systems Development, including Electric Drivetrain & Autonomous Driving, Qoros
Roger Looney has 30 Years experience in automotive tooling, engineering and design and over 20 years experience in Asia. Current goals include utilizing that knowledge and experience to develop world class, exciting vehicles of the future.
Specialties: Automotive Product Development and Launch, Electronics, Hybrid & EV development, Asia Mergers and Acquisitions, Six Sigma, Product Development, New Business Development in Asia, Team Building in China, Low Cost Country Sourcing, Contract Development and Negotiation in China, Korea, Japan.
By Mr. Bevin Jacob, Head of Biz Dev, APAC, Continental Intelligent Transportation Systems
An ‘Internet of Vehicles’ enthusiast, Bevin Jacob envisions building and incorporating “Mobility Services” to improve Consumer’s digital lifestyle. He has 16 years of active involvement in building “Connected Solutions” for Mobile, Telematics and Multimedia Devices. Bevin enjoys working with highly motivated teams to bring about disruptive innovations in connected vehicles business.
7:40 pm: Panel discussion:Future Cars
Moderator: Mr. Bill Russo, Managing Director, Gao Feng Advisory Company
Bill Russo is the Shanghai-based Managing Director and the Automotive Practice leader at Gao Feng Advisory Company. His over 30 years of experience includes 15 years as an automotive executive, including 12 years of experience in China and Asia. He has also worked nearly 12 years in the electronics and information technology industries. He has worked as an advisor and consultant for numerous multinational and local Chinese firms in the formulation and implementation of their global market and product strategies. While the Vice President of Chrysler North East Asia, he successfully negotiated agreements with partners and obtained required approvals from the China government to bring six new vehicle programs to the market in a three-year period, while concurrently establishing an infrastructure for local sourcing and sales distribution. Mr. Russo has a Bachelor of Science in Chemical Engineering from Columbia University in New York, and a Master of Science in Manufacturing Systems Engineering from Lehigh University in Bethlehem, Pennsylvania. Mr. Russo is a highly sought after opinion leader on the development of the China market and the automotive industry.
Panel additionally includes:
Ms. Vanessa Moriel, Managing Director Asia, Liase Group
Vanessa Moriel is Managing Director Asia with the LIASE Group, a global retained executive search firm & talent management consultancy that specializes exclusively in automotive and mobility companies.
Ms. Moriel has been providing CEO & top management placements and succession expertise for global automotive companies across the Asia-Pacific region for close to 15 years. She previously worked for Schlumberger, the London Consulting Group, Frito-Lay (Pepsico) and Fiducia Management Consultants.
She holds a Bachelor’s degree in Chemical Engineering for the Institute of Technology and Superior Studies of Monterrey and has completed an Executive Program in Strategy and Organization from the Stanford Graduate School of Business.
Mr. John Shen, Managing Director, Accenture Strategy, Greater China
Mr. Shen Jun has more than 20 years of industry and management consulting experience. He is now Managing Director with Accenture Strategy Greater China. Before he joined Accenture, Mr. Shen was Senior Partner at Roland Berger Strategy Consultants and has been leading the Automotive Competence Center (ACC) in Greater China. Mr. Shen has served many leading MNC/local companies in automotive industry, covering a wide range of topics. Mr. Shen has in-depth knowledge and expertise in the functional areas of corporate strategy, merger and acquisitions, operational benchmark, organizational restructuring and sales and marketing management (especially on branding, channel optimization, pricing and new product launch), etc.
8:10 pm: Q&A
Where: Courtyard by Marriott Shanghai Jiading 上海绿地万怡酒店