Chinese Automakers Hope to Leapfrog the Competition
Following up my last post on luxury SUVs, I noticed a rash of stories today about the opposite end of the automotive spectrum — the electric car. There has been a lot of chatter about Chinese electric cars in recent months, mainly brought on by Warren Buffett’s $232 million investment in BYD last October. Since then, there has been more talk on both sides of the Pacific Ocean about increasing production of electric and hybrid vehicles, not only for the environmental benefits they bring, but also to corner a lucrative new global market. As China’s automotive market is still relatively young, competition will be fierce between new Chinese automakers like Shenzhen-based BYD and Tianjin-based Tianjin-Qingyuan and the more established Japanese powerhouses and North American giants (if they manage to get their act together in time). No matter what, manufacturing electric and hybrid vehicles is big business, even if you just count the Chinese domestic market. And the Chinese government is making it clear that they think the country can become the world’s electric vehicle manufacturing epicenter and eclipse production from other traditional auto capitals. As the New York Times writes,
China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year, government officials and Chinese auto executives said. By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000.
Although I find it strange that this consultancy combined figures for Korea and Japan — since they have very different car markets — the core point, that Chinese production is expected to rise exponentially in the next 3 years, may hold. However, we have to keep in mind that although these numbers are huge, so is China and its population.
The important issue is exporting and competing with other global automakers, like Honda and the Big Three, who have plans of their own for electric and hybrid cars. One advantage that Chinese carmakers have here, though, is — much like the tech-manufacturers before them — that in many ways, China is still a blank slate, infrastructure-wise. Although it is far more developed now than it was 10 or 15 years ago, Chinese industries are often less entrenched than their non-Chinese counterparts, and thus are able to retool or retrain staff more quickly, “leapfrogging” into next-generation technology without having to deal with the long, expensive R&D process that Japanese and American manufacturers often do. Like the Times said,
To some extent, China is making a virtue of a liability. It is behind the United States, Japan and other countries when it comes to making gas-powered vehicles, but by skipping the current technology, China hopes to get a jump on the next.
Basically, China — as a manufacturing and consumer “blank slate” up until, arguably, the mid to late 1990s, has benefitted immensely from their ability to take advantage of cutting-edge technologies now, rather than undergoing the pricey process of retrofitting that American automakers likely will have to deal with if they are to remain globally competitive. This is not to say that Chinese electric and hybrid manufacturers will have it easy. They’re going to have massive difficulties going forward, even though the potential payout is mind-blowing. It’s going to be an uphill struggle for a while, not least because many non-Chinese markets are wary of Chinese automotive quality and safety — since they have yet to be exposed to Chinese vehicles — which, I assume, was a problem for other Asian automakers in the 1960s onward. As The City Fix indicates, some of the obstacles facing these automakers (in their home country alone) include:
[That] Smog will persist. Seventy-five percent of China’s electricity comes from coal, which produces more pollution and greenhouse gases than other fuels.
A report by McKinsey & Company last autumn estimated that replacing a gasoline-powered car with a similar-size electric car in China would reduce greenhouse emissions by only 19 percent. It would reduce urban pollution, however, by shifting the source of smog from car exhaust pipes to power plants, which are often located outside cities.
Urban dwellers will find electric cars inconvenient. Since most urban Chinese live in apartments, they cannot re-charge their car batteries in their own driveways, so the government will have to set up public charging stations.
Chinese consumers are wary of rechargeable lithium-ion batteries. Some counterfeit batteries used in cellphones and laptops have caught on fire, or worse, exploded and caused injuries. Even though the types of batteries used in cars are more “chemically stable,” it will be hard to convince consumers of their safety.
Lithium-ion batteries are expensive. Gas is still relatively cheap. Why would thrifty Chinese consumers spend more on an electric car?
So, once again, everything is still up in the air. China has a real opportunity here to capitalize on a global shift in sentiment towards more environmentally-friendly vehicles — both due to unsteady energy costs and climate change, perhaps in equal parts — but articles in many media outlets have a deceptively alarmist tone.
While Chinese automakers like BYD and Tianjin-Qingyuan are young, well-capitalized, and agile enough to quickly start mass producing these electric and hybrid vehicles, it is far too premature to say “Chinese automakers are going to take over the world!” as some articles have suggested.
I would posit that these Chinese automakers have a steep road ahead internationally. Domestically, as young companies they still have a lot to learn about how to appeal to Chinese consumers, who are (unlike many Korean and Japanese consumers) often not driven towards purchasing domestic based on patriotism or brand nationalism alone. For Chinese electric/hybrid automakers to truly succeed, they will have to convince Chinese consumers — who by and large favor foreign car companies if they can afford them — that their quality and price-point is right. That is not going to be easy, even with government help and subsidies.
As for competing globally, that may be even harder. At the moment, since Chinese brands are typically unknown on a global scale, the only way a Chinese automaker will be able to compete in established markets like North America or Europe is on price alone (a la the Tata Nano). And to do that, they would obviously have to cut some corners. I would assume these automakers would prefer to compete with the Hondas and Fords of the world on a peer level, however, so I would imagine that it will still be a while until these Chinese carmakers end up at an automotive dealership near you.
That is not to say the Chinese government’s push is not an important development. Personally, I see it is a good thing, business-wise, for non-Chinese carmakers, rather than some kind of cause for alarm.
As with everything, a litle competition can be a good thing.