Opportunities in China's Green Vehicle Industry

With the recent news that Daimler-Benz is teaming up with Warren Buffet-backed BYD to produce electric cars in China, as well as Geely's news that it will introduce electrics at the Auto China exhibition in Beijing on April 23rd, many investors are looking for ways to profit from China's turn toward electric and hybrid vehicles. Substantial incentives for investment in green car technology have been put in place, and many see progress on hybrid cars as a natural next step.

Subsidies to Boost China's Alternative Car Market

According to public comments by government officials, China's goal is to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 in 2008. In comparison, according to some published estimates, Japan and South Korea together will be producing 1.1 million hybrid or all-electric cars and trucks by then and North America will only be producing 267,000.

Chief among the tools that China plans to use to achieve this dominant position are subsidies for industry. Incentives for hybrid vehicles were first announced in February 2009 when a government demonstration program to promote new energy vehicles was launched in Beijing. As part of the country's effort to ignite enthusiasm for new energy cars, the government will give subsidies for new energy vehicles including hybrid, electric and dual-mode models in 13 cities nationwide including Beijing and Shanghai. According to a detail statement issued by the Ministry of Finance later, a maximum of RMB 500,000 and RMB 600,000 will be given to hybrid and electric passenger cars used in the public sector respectively.

However, what could be a more powerful shot in the arm to cost-conscious consumers and car makers is a recent plan passed by the State Council in December 2009 that will give hybrid subsidies to private consumers in five major cities:Beijing, Shanghai , Chongqing, Changchun and Shenzhen.

So far, Chongqing has already rolled out a detailed subsidy plan that covers both public and private sectors. Private buyers can get a subsidy package of RMB 43,000 for hybrid cars. With the aggressive stimulus plan in place, the city aims to put 1150 alternative energy cars on the road by 2011.

US Industry Shows Growth Potential for Green Cars in China

The U.S. is currently the largest hybrid car market in the world. As of January this year, more than 17,157 hybrid cars had been sold in the U. S. In addition, 8 new models of hybrids became available in the U.S. for 2010 bringing the total list to 32 models according to Hybrid Cars Guide. JD Power, a global marketing information services company, predicts that hybrids will account for 7% of the U.S car market in 2015 – up from 2.2% in 2007.

However, in China, only seven hybrid passenger car models were available at the end of 2009.That number is expected to reach 19 by 2015. A report published by Fox Business on Feb 2, 2010 revealed that Toyota is looking to introduce the Camry hybrid to China during 2011.

Domestic brands are also working to enter China's green vehicle sector. BYD, the Chinese battery company that got into the auto market and is now backed by Warren Buffet, hopes to sell as many as 9 million hybrid or plug-in cars a year by 2025, according to company executives. This figure is equivalent to the total number of cars and trucks that Toyota, currently the world's largest auto maker, sold last year.

However, BYD's plans are still in the early stages. In December 2008, BYD became the first automaker in the world to sell a plug-in hybrid, but the company sold only a few hundred F3DM plug-in hybrids in its first year according to Reuters.

In addition to BYD, domestic brands including SAIC Motor, JAC, Dongfeng, Brilliance Auto, and FAW Car all plan to introduce hybrid cars in the next two to three years.

Subsidies to Help Buyers Overcome Cost Barriers

Although both consumers and market analysts believe that new energy cars, especially hybrids, would be a popular alternative to traditional vehicles, sales in the passenger car market have so far been constrained by higher costs.

In the case of Toyota's popular Prius hybrid, the car is imported to China, and thus subject to prohibitive tariffs. Because of this import issue, combined with higher manufacturing costs, during the first three months of 2009, fewer than 1000 units of Prius were sold in China. During the same period, over 70,000 units were sold in the U.S. .

And Toyota is not alone in facing this pricing challenge. Average market prices for two of the most popular imported hybrid models, Prius and Civic, are 40% higher than that of conventional petrol-powered types offered by the same brands. Even major domestic car makers that offer hybrid models, including Chang'an and BYD, at lower prices than imported models are having trouble competing with cheaper petrol models.

However, prices are becoming more affordable. The Tianjin-Qingyuan Electric Vehicle Company will begin offering its all-electric Saibao midsize sedan this year – using a car body from a gas-powered sedan that normally sells for RMB 100,000 according to a New York Times article. Buthe battery pack and electric power train are expected to cost another RMB 95,000, according to Wu Zhixin, the company’s general manager. However, after a government subsidy of RMB 60,000, the Saibao electric car will cost RMB 135,000 – making it more affordable than even low-priced cars like Volkswagen's popular Santana model.

Fleet Demand for Green Vehicles Lures Foreign Suppliers

Before China rolled out subsidies for consumer vehicles, it first put in place incentives for commercial and public fleets to choose alternative energy cars, trucks and buses for their fleets. These incentives have brought numerous opportunities for international suppliers to find customers among China's domestic vehicle producers.

Huang Gaocheng, Head of Eaton China Truck Division, is optimistic about the growth in demand for hybrid and electric vehicle components by domestic manufacturers.

“The Chinese government is pushing the sales and technology development of hybrid cars, which is a good opportunity for component suppliers with leading technology. In the China market, Eaton's focus is on the hybrid truck and bus segments and we have cooperation with major domestic car makers like Futian, Guangzhou Bus and Hengtong,” Huang said.

Headquartered in the U. S, Eaton is a leading hybrid power train provider worldwide. China accounted for 10% of its global sales in 2008. The company is planning on manufacturing in China in an effort to sell more products there and to lower manufacturing cost.

Eaton's competitors are jumping into the market too.

“Almost all the leading manufacturers in the world hybrid component industry including power system, cell and generator parts makers have become active in China. It is a market that they can not afford to ignore,” said Wang Zhengzhuan, marketing manager for Allison Transmission in China. Allisonwon an order for 500 sets of hybrid power trains from the Beijing government in late 2008.

While private consumers have not been buying many hybrid vehicles in China, companies have found a customer in the government. Faced by growing concerns over pollution and the volatile oil prices, the Chinese government is becoming a major buyer for hybrid vehicles. The purchasing power of the government has become an additional incentive for investors in the industry, although a lower profile one than the more direct subsidies.

At present, Beijing has 870 hybrid buses and 100 electric buses in operation. Changsha, the capital city of Hunan, already has 253 hybrid buses in place and will add another 250 by 2010. In Shanghai, the government is expected to have 350 hybrid buses operating during the 2010 World Expo.

Subsidies and Industry Growth Point to a Prosperous Future

With China becoming the world's largest auto market in 2009, combined with the government's support for alternative vehicle technology and investment, there should be opportunities for investors in hybrid and electric vehicle technology for years to come. As the industry is still in its early stages, no one can be sure who the eventual champions will be, but the potential for China to lead in this important new sector is clearly in place.

ENDS