After looking at the February 2019 brands ranking for Europe, lets zoom in on the models ranking. Eternal best seller Volkswagen Golf is one of the biggest losers in the top-10, just behind the Ford Fiesta as both lose by double digits. The Renault Clio is back into its #2 spot although the Volkswagen Polo is growing faster. Still, the Clio’s continued progress is impressive considering the new generation was introduced at the Geneva Auto Show early March and will be in showrooms later this year. The Citroen C3 takes a record fourth place, outselling its sibling Peugeot 208 for only the third time since the launch of the latter in early 2012. The only other two times the C3 was ahead were in August and December 2018, but it was never as high at 4th. The only crossovers in the top-10 are both from VW, with the Volkswagen Tiguan in 5th place and the Volkswagen T-Roc in 8th place. [Read more…]
After a 7% decline in January, European new car sales were down by 2,75% in February 2019, to 1,12 million sales. For the first two months of the year, sales are down 5% to 2,31 million units. Most of the decline can still be attributed to the after effects of the introduction of new fuel efficiency and emissions testing standard called WLTP (Worldwide harmonized Light vehicle Test Procedure) in September. Among the major markets, demand for new cars increased modestly in Germany (+2,7%), France (+2,1%) and the United Kingdom (+1,4%) last month. However, in Spain (-8,8%) and Italy (-2,4%) car registrations continued to decrease for the sixth consecutive month. Among the smaller European markets, Lithuania was the most dynamic with sales almost doubling (+94,5%), followed by Romania (+37,5%), Hungary (+12,6%), Greece (+10,6%) and Luxembourg (+10,4%). Fastest declining markets were Iceland (-30,9% to just 801 registrations), Cyprus (-17,7% to 891 registrations), Sweden (-14,9%) and Netherlands (-14,5%), with Finland (-11,3%) and Austria (-10,8%) also down by double digits.
Year-to-date, some markets saw a strong drop compared to last year, most notably Spain (-8,4%) and Italy (-4,9%), but new passenger car registrations remained more or less stable in Germany (+0,6%), France (+0,5%) and the United Kingdom (-0,6%).
The market for domestic passenger car sales in China continues its decline in 2019 with 8 consecutive months of declines from July 2018 to February 2019. With two months of double digit declines in January (-16,7%) and February (-17,6%), the market doesn’t seem able to recover soon. However, there’s a silver lining to this apparent malaise, as these numbers reflect wholesale data. Retail sales of new light vehicles dipped just 4% in January, which means the big drop in wholesale deliveries was a result of a reduction in dumping excess inventories by carmakers on their dealerships. [Read more…]
No, not that Great Wall.
The focus here is on China’s Great Wall Motor, and some of its more recent and noteworthy efforts in the EV market. More specifically, we’ll take a look at Great Wall’s new Ora brand, its joint venture with BMW, its investment in Yogomo Motors, and how all of this relates to China’s New Energy Vehicle/NEV market. For any reader that is not familiar with the NEV terminology, NEV refers mostly to EVs and hybrids, but also includes fuel-cell vehicles.
This blog also takes a look at the choices that automotive OEMs/Original Equipment Manufacturers have when responding to the Chinese government’s policies and regulations related to fuel economy standards and the NEV credit system. NEV credits are sometimes called “carbon-credits”, because they’re part of the Chinese government’s broader efforts to cut air pollution and related carbon dioxide emissions into the atmosphere.
Great Wall’s Launching of the new Ora brand
Last year Great Wall launched its new Ora brand, which stands for Open, Reliable, and Alternative. Presently, the brand has two products in the market, the Ora iQ, a compact Crossover (left side), and the Ora R1, a four-door sub-compact (right side).
The Ora iQ was launched last September, while the Ora R1 launched a few months later in late December.
A third model, the Ora R2 is expected during the third quarter of this year. A concept version appeared at the Beijing Auto Show in 2018, as seen below:
According to an Automotive News Europe article here, Great Wall plans to have a total of four Ora models on the market by 2020.
At least for now, Ora’s brand identity is oriented towards small BEVs, aka “battery electric vehicles”. BEVs are also sometimes called “pure” EVs, because they’re powered by batteries only, in contrast to PHEVs (Plug-In Hybrid Vehicles) which are powered both by fossil fuels and batteries. Small BEVs like the Ora R1 or the Ora R2 are relatively inexpensive to produce. EVs of all sizes (small-medium-large) are valuable to manufacturers because they generate NEV credits, which can be used to offset CAFC/Corporate Average Fuel Consumption credit deficits. Deficits occur when a manufacturer falls short of its fleet average target, as set by the regulator. In the case of China, the regulator is the central government’s powerful Ministry of Industry and Information Technology (MIIT). CAFC credit deficits can be expensive, because they’re synonymous with “non-compliance,” and non-compliance with the policy and regulations can result in expensive fines or other costly penalties.
Government subsidies play a major role in keeping the retail price of NEVs low. Small EVs, such as those offered through the Ora brand can have “after subsidy prices” that are below USD 10,000. Although “alternative,” is the third reference letter in the brand name (Ora), a case can be made that “affordable,” would have been equally or perhaps even more appropriate. For example, the Ora R1’s “after government subsidies” cost to the consumer, ranges between 59,800 RMB and 77,800 RMB (USD 8,917 to USD 11,601) depending on options. The affordability aspect of the brand is undoubtedly attractive to younger budget conscious consumers.
The new brand Ora, with its implicit focus on “small,” or “urban” – – must feel a bit different for Great Wall and its corporate culture. In contrast, the company’s most successful brand Haval, projects a more rugged, off-road SUV type image.
The company’s Wey brand, launched in 2017, projects “upscale”, or elevated – – and above the fray.
So What’s the Alternative in Ora?
I’ve reflected a bit on Ora’s “alternative” brand emphasis, and although the subliminal or intended message is not clear to me – – it strikes me that simply choosing to buy a small BEV – – is likely part of the brand’s “alternative choice” or “alternative lifestyle” messaging. Choosing to be green, or at least green-er – – is also likely part of the pitch.
Great Wall’s choice to launch the Ora brand indicates that the company sees an opportunity to establish a larger presence in China’s growing NEV market. The Ora brand appears to be targeting young car buyers that are mostly urban, budget conscious, and green – – or even a whole rainbow of colors. 😉
One of the fun aspects of Ora’s voice recognition system – – is that the system gets activated – – when the driver calls it by name – – “Ora!” – – (kind of like a wake up call – – or a like a cute puppy that comes running, as soon as it hears its name).
Great Wall, with its Ora brand, is making a more concerted effort to establish itself in China’s NEV market. Much of the sales volume in this market exists with smaller cars, and by all indications – – that looks like the market that Ora is focused on.
Of the Top Twenty Best-Selling NEVs in China last year (2018), seven were compacts, sub-compacts, or micros. The table below shows these seven, with their respective sales volume data. It also sheds light on at least some of the models, that Great Wall and Ora are competing against.
The seven best selling small EVs had a cumulative sales volume of more than a quarter million vehicles.
As a group (i.e. Compacts+Subcompacts+Micros) small EVs represented just over one third (37%) of the total sales volume for China’s Top Twenty Best Selling NEVs last year. So in other words; its a sizable market. This at least partially explains why Great Wall and its Ora brand are entering this market segment. Government policies and regulations related to China’s more rigorous fuel economy standards and the promotion of NEVs, also are likely having an influence. Subsequent sections of this blog explore these aspects in greater detail.
Great Wall’s earliest efforts in the NEV market; prior to the launching of Ora
Great Wall’s earliest attempts at entering into the NEV market have been – – “less than stellar.” In 2016, Great Wall launched an EV variant of its C30 sedan.
More recently, in April of 2018, the model received an upgrade, with a higher battery capacity.
One reviewer, when reviewing the earlier version of the C30 EV – – – – made a number of interesting observations. For readers that want to see the full 2016 review, you’ll find it here. I’ve pasted some of the key points, verbatim, below:
The Great Wall C30 EV has been launched on the Chinese car market, …
The C30 EV is an electric car based on the C30 sedan, a car that is possibly more rare than a Ferrari. … Very few dealers are selling it, … so the C30 is a true rarity.
One might wonder why Great Wall didn’t spend the money on electrifying one of their best selling Haval SUVs, which would make much more sense than this electrifying this ancient pre-facelift version of a slow selling sedan that you cannot even buy if you really wanted to because most Great Wall dealers don’t even sell it. What is the point of it all..?
The point might be that Great Wall isn’t actually planning to sell any, a common trick among Chinese automakers. They just want to have some EVs on their books to bring the average fuel consumption of their lineup down, as demanded by the Chinese government.
Although, there might be other sides to this story that I’m missing (if so, I’d like to hear it), based on historical sales volume data, and the review above, it seems the C30 EV never really established much of a presence in the market.
During the second quarter of 2018, Great Wall launched its second NEV, the Wey “P8” – – a PHEV SUV.
Sales volume for the P8 has been low, and trending downwards. During nearly every month since June of last year, sales have been diminishing. December, which is normally an “up-month” for the whole industry, was the exception to the trend.
So considering Great Wall’s track record, both with the C30 EV, and the P8 PHEV; one might be forgiven for being skeptical about the company’s potential in the NEV sector. But taking such a view would be based on a fairly limited look at just two of its earliest models.
Great Wall revisits EVs with Ora – – Small is Beautiful
On the other hand, with the launching of the Ora brand, and with a growing market for small EVs in China, Great Wall has reasons to be optimistic. The brand appears to be off to a pretty good start. Since the Ora iQ compact Crossover was launched last September, sales volume is trending upwards. Not only that, but as seen in the graph below, nearly twice as many iQ’s were sold in January 2019 (the most recent month for which data is available), compared to the previous month.
As noted earlier, Ora’s sub-compact, the R1, was launched in late December. With just one month of data available (Jan. 2019), its too early to talk about trends. Nevertheless, the R1 seems to be off to a pretty good start with 1,749 units sold during its first month in the market. That’s more than twice the number of Ora iQ’s that were sold during its first month. It’s also not so far from the 2,036 level that the iQ reached after four months.
In addition to market demand, What else is contributing to Great Wall’s Interest in Small EVs?
In short, the answer is – – China’s recent government policies and regulations that govern fuel economy standards and the promotion of New Energy Vehicles.
More specifically, in September of 2017, China’s Ministry of Industry Information and Technology (MIIT), the government entity responsible for fuel economy standards and the promotion of New Energy Vehicles, issued a new policy:
The parallel management method for average fuel consumption of passenger car enterprises and new energy vehicle points.
The original document, that explains the policy, in Chinese, can be found here.
Luckily for non-Chinese speakers, a much shorter easier to understand explanation of key aspects of the policy exists in English here. Produced by the US government’s Library of Congress, and its Global Legal Monitor, some of the key text is highlighted below:
Auto companies producing or importing over 30,000 non-NEV passenger cars per year will be required to earn NEV credits equal to a set percentage of their non-NEV sales in China, starting from 2019. The NEV credit percentage targets are 10% for 2019 and 12% in 2020.
The percentage targets are for NEV credits, not NEV sales. Each NEV may generate multiple credits, as follows:
Each plug-in hybrid may generate two credits.
Credits each pure electric car may generate depend on the electric range.
Credits each fuel-cell car may generate depend on the rated power of fuel cell systems. (Id. annex II.)
For example, if a company produces 100,000 non-NEVs in China in the year 2019, with a 10% NEV goal, it needs 10,000 NEV credits. The goal may be achieved by producing 5,000 plug-in hybrids (two credits per vehicle), amounting to 5% of the company’s non-NEV sales.
A company generates surplus NEV credits if its actual NEV credits are greater than the NEV target and a NEV credit deficit if its actual NEV credits fall short of the target. Similarly, it generates surplus CAFC credits if its actual CAFC is lower than its CAFC target under the existing fuel consumption regulation, and a CAFC credit deficit if its actual CAFC exceeds its CAFC target.
The same source notes that China’s fuel economy standard for 2020 is 5.0L/100 km, which represents an OEM’s expected fleet wide average target. The previous standard, pegged to the end year 2015, was less efficient, at 6.9L/100 km. By comparison, the new more rigorous 2020 standard represents an impressive 28% increase in fuel efficiency.
Great Wall produces and sells mostly SUVs. Sales volume for January 2019 is graphed below, illustrating the point:
If you visit Great Wall’s China Haval website, you’ll see a product line that looks like this:
If you look at the Wey brand’s product line – – you’ll see this:
You get the picture, you’ll see a lot of SUVs. 😉
Market demand for SUVs in China, is often described as insatiable. Relative to sedans and smaller vehicle types, growth rates for the SUV market, has been, and remains strong. It’s therefore easy to understand why Great Wall’s business strategy and product line is so vested in SUVs.
But SUVs tend to be heavy, and as such, they tend to have lower fuel efficiency. The same is true for Great Wall’s Wingle brand Pickups, they’re also heavy, and their fuel economy ratings are even lower.
Because SUVs dominate Great Wall’s product line, this makes it more challenging for the company to meet and comply with the Chinese government’s more demanding fuel economy standards. If we look at the Wey product line up above, only the P8 PHEV, with its fuel economy rating of 2.3 L/100 km., comes in below the 6.9L/100 km. standard referenced above. The other three models, meaning the W5, the W6, and the W7 – – all have fuel economy ratings that are above 7 L/100 km. Although the P8 helps Great Wall with its fleet wide average, the problem is that market demand for the P8 has been tepid at best. So Great Wall can produce a lot of P8’s to bring its fleet wide average down, however if they’re not selling well – – and they’re not – – that’s a pretty expensive strategy.
A failure to comply with with the government’s more rigorous CAFC standards – – or a deficit in terms of the parallel system of earning NEV credits – – would be expensive for any and all OEMs, including Great Wall. In other words, the policy has teeth, which could negatively bite into corporate profits in a major way. The penalty for non-compliance is described in a January 2018 Policy Update here, by the International Council on Clean Transportation (ICCT):
Failure to meet CAFC or NEV credit targets after adopting all possible compliance pathways will lead to MIIT denial of type approval for new models that cannot meet their specific fuel consumption standards until those deficits are fully offset.
So in other words, China’s Ministry of Industry and Information Technology (MIIT) has the power to approve or deny the launching of new models into the market. A company in non-compliance status could find that it’s unable to launch and sell new models – – until it comes back into compliance. That seems like a very strong incentive to me, because, from a long term perspective, companies must get their new models to market, in order to compete and survive.
Compared to its peers, Great Wall’s adjustment to the new policies and regulations is likely to be more challenging. This was highlighted in a Bloomberg News article titled China is About to Shake Up the World of Electric Cars, which included a look at various automotive OEMs in China, and their EV “readiness.” Below, I’ve added bold to the Bloomberg text that pertains to Great Wall:
Companies that have a head start on producing NEVs have the highest credit scores. Those include BYD Co., BAIC BluePark New Energy Technology Co. and Geely Automobile Holdings Ltd., according to the Ministry of Industry and Information Technology. The highest negative fuel consumption credits were Ford Motor Co.’s China venture with Chongqing Changan Automobile Co., leading SUV maker Great Wall Motor Co. and Dongfeng Motor Corp.
The key words above are “negative fuel consumption credits.” Remember, Great Wall and all automotive OEMs in China have a CAFC (Corporate Average Fuel Consumption) target, set by the government, based on the fuel economy ratings of an OEM’s corporate fleet. Because Great Wall produces mostly SUVs, with relatively lower fuel economy ratings, this makes it more challenging to meet its CAFC target. As a result, Great Wall has high negative fuel consumption credits.
Negative fuel consumption credits can be addressed, or remedied, in multiple ways. Options are outlined in China: New System Relating Corporate Average Fuel Consumption to New Energy Vehicle Sales Takes Effect, and key text from that source appears below:
To offset a NEV credit deficit, a company may purchase NEV credits from other companies. To offset a CAFC credit deficit, more options are provided, including:
- using banked CAFC credits,
- transferring CAFC credits from affiliated companies,
- using self-generated NEV credits, and
- purchasing NEV credits from other companies.
Considering Great Wall’s product line, with its SUV emphasis, it seems unlikely that Great Wall has banked CAFC credits to use. In two subsequent sections below, I take a look at two of the three remaining options or remedies. Evidence suggests that Great Wall is using at least two of these options to pro-actively comply with the new government policies and regulations, that are reshaping the automotive industry and market in China.
Using self-generated NEV credits; Great Wall will get a boost; from its new brand Ora
Great Wall’s launching of the Ora brand, seems like a pretty clear response to the policy.
Each new Ora vehicle that rolls off the assembly line, and subsequently gets registered with the regulator (MIIT), generates NEV credits. The number of credits depends on the models specs. Range is particularly important for determining a specific NEV credit score. For pure EVs (aka BEVs), other variables such as energy consumption (kWh/100 km.) and curb mass (kg.) are also used. For a detailed explanation of how NEV credit scores are calculated, both for BEVs as well as for PHEVs, readers should consult China’s New Energy Vehicle Policy Mandate (Final Rule) by the International Council on Clean Transportation/ICCT.
Ora’s emphasis on smaller cars makes a lot of sense, because they’re relatively inexpensive to produce. There are other important benefits as well, for example, for every Ora R1 that Great Wall produces, the company earns 5.42 NEV credits. This is close to the “capped” or maximum 6.0 credits that an OEM can earn for the production of any BEV model. Ora’s compact Crossover, the iQ, on the basis of its specs alone, would earn 6.7 credits, however, because of the cap, it maxes-out at six credits. The policy and regulations apply a distinct and different cap for PHEVs. The maximum NEV credits that any PHEV can earn is two; which is the number that Great Wall earns by producing one of its Wey P8 SUV plug-in hybrids. Decisions about production quantities are primarily determined by market demand, however they’re also influenced by policies, regulations, and related factors. Whether an OEM currently has a positive or negative fuel consumption score, could be one such factor.
By extension, when OEMs with negative fuel consumption scores (eg. Great Wall, Dongfeng, or the Ford-Changan JV) decide that they’re going to use “self generated NEV credits” to improve their negative fuel consumption scores, they’re looking for an optimal or most cost-effective means for doing that. This undoubtedly includes some type of cost-benefit analysis that takes into account key variables such as the cost of production per vehicle, market demand, profit margins, and the number of NEV credits associated with each model.
While writing this blog, I came across an interesting paper about the “Impacts of China’s Subsidy Policy and New Energy Vehicle Credit Regulation …” The authors and researchers are from Tsinghua University in Beijing, one of China’s leading universities in the fields of automotive and energy research. The paper includes a detailed analysis that shed’s light on two key, and related questions:
Under the current policies and regulations, what vehicle size, benefits most from the subsidies?
Under the current policies and regulations, what vehicle size, has the highest cost- effectiveness, for earning NEV credits?
For automotive companies competing in China, and for their senior managers, these questions are important. This is particularly true for companies with negative fuel consumption scores.
The Tsinghua University paper includes key findings and some great graphs that directly address the questions above. However, before highlighting these findings, its useful to briefly review the topic of “vehicle classes” in China, and their relationship to vehicle weight, and more specifically, to a concept called “glider weight.”
Similar to the European classification system, China has six vehicle classes (A00, A0, A, B, C, D). Glider weight, is the weight of a vehicle without a powertrain. For the sake of simplicity, glider weight can be thought of as the ease with which a vehicle coasts – – when power is not being transmitted from the engine to the vehicle’s axles. In the case of an EV, the concept is the same, but just substitute “battery and electric motor” for “engine/ICE”.
China’s system for classifying vehicles uses glider weight, along with other factors. Smaller lighter cars tend to have lower glider weight values, while the opposite is true for larger and heavier cars. The table below shows China’s six vehicle classes and their associated glider weights:
So with the benefit of now knowing a little bit more about China’s vehicle classes, we can now posit the following key question:
If you’re manufacturing cars in China, and you want to get the most from the subsidies and the NEV credit system, what types of cars (vehicle class) should you produce?
Regarding the contribution of subsidies, towards offsetting manufacturing costs, the researchers found that:
Small vehicles will consistently obtain a higher contribution rate than that of large vehicles.
Except for BEVs in the A00 class, the smaller the vehicle is, the higher the contribution rate becomes.
Overall, small vehicles and vehicles with a high driving range are encouraged by the subsidy policy. Under the subsidy, the smaller the vehicle type is, the greater the relative manufacturing costs offset by the subsidies will be.
The ideal circumstance is that the contribution rate decreases over time and BEVs achieve competence compared with internal combustion engine (ICE) vehicles without the subsidy of the government.
The research design carefully considered the fact that subsidies are changing and diminishing over time. For this reason, when analyzing NEV credits and cost-effectiveness, three distinct time periods (years) were used; 2018, 2020, and 2025. Within this context, it’s important to remember that subsidies will end after 2020.
The credit cost-effectiveness (for BEVs), under the NEV credit regulation, is shown in the three graphs below for each of the three reference years:
What’s noteworthy about these findings and graphs is that fairly consistently across reference years the smallest cars are the most credit cost-effective. An exception is seen in the third graph, which represents the year 2025, when small (but not the smallest) A0 class cars become more credit-cost effective.
So considering that small cars are almost always more credit cost-effective, Great Wall’s launching of the Ora brand, with its emphasis on small (i.e. compacts, and sub-compacts), makes a lot of sense.
So too, does Great Wall’s recently formed joint venture with BMW, to produce Mini brand EVs, which is described in greater detail below.
Great Wall’s Joint Venture w/ BMW, to produce Mini EVs.
Back in October of 2017, reports began to circulate about the possibility of a joint venture between BMW and Great Wall, for the purpose of producing BMW’s iconic Mini brand.
Great Wall’s investors reacted enthusiastically to these reports, and on Oct. 11th 2017, Great Wall’s stock price on the Hong Kong Exchange jumped 14 percent in a single day.
About four months later, while negotiations were still underway, a Reuters article here, highlighted some of the benefits that Great Wall was hoping to realize via the joint venture:
- Great Wall said in a separate statement a joint venture with BMW would greatly improve its technology level and brand premium, better meet the needs of consumers and further tap into the new energy vehicle market at home and abroad.
- Automakers and suppliers are scrambling to meet tough new Chinese quotas for less polluting cars, which call for electric and rechargeable hybrid vehicles to account for a fifth of total sales by 2025.
In July of 2018, the two companies finalized negotiations, and announced the creation of their new joint venture, to produce electric Minis in China.
As noted in an article here, the new venture, which goes by the name Spotlight Automotive Ltd., was celebrated by both Germany and China at the highest political levels. The signing ceremony took place in Berlin, and was attended by Germany’s Chancellor Angela Merkel, and China’s Premier Li Keqiang.
The size of the investment in the new JV is substantial, as reported in an AP article here,
Great Wall put total investment in the venture at 5.1 billion yuan ($770 million) and said it is aiming for annual production of 160,000 vehicles.
The same source noted that:
China was MINI’s fourth-largest market in 2017, with 35,000 vehicles delivered, … .
Spotlight Automotive Ltd., also will make electrics for the Chinese partner’s brand.
The electrics venture with BMW is an important boost for Great Wall, which industry analysts warned would struggle to satisfy Beijing’s sales quotas due to its fuel-guzzling vehicle lineup.
The first Mini EVs produced by the joint venture are expected sometime in 2021.
Great Wall’s New Factories in China, and the Shift towards NEVs
Before delving into the topic of new factories, its useful to briefly revisit where Great Wall as a company currently stands, in terms of its brands, and their associated sales volumes. Exports are fairly negligible, and therefore the focus here is on domestic sales.
Great Wall’s most important brands are Haval and Wey. Together, they represent almost all of the company’s sales.
Haval is by far the dominant brand. Eighty-four percent of the cars that Great Wall sold last year were Haval vehicles.
So it seems pretty clear, that if Great Wall is going to adjust to the new policy realities described above (i.e. the policies that address CAFC and NEV promotion), much of the adjustment will have to be accomplished through the Haval brand. We’ll return to this subject later in the blog, but first lets take a closer look at Great Wall’s new factories, and the types of cars that will be produced at these facilities.
Great Wall’s New Factories in China
Great Wall’s investments in new factories in China indicate that the company is giving much more strategic importance to the NEV market. The JV plant with BMW, which will be outputting electric Minis and other EVs for Great Wall; has a planned total annual capacity of 160,000 vehicles, and is being funded by a USD 770 million investment. The facility is being built just to the Northwest of Shanghai, in the city of Zhangjiagang, in Jiangsu province.
Approximately two hours south of Zhangjiagang, in the city of Pinghu, another new plant is planned.
Great Wall’s new plant in Pinghu, will produce a combination of Ora EVs as well as Haval F Series SUVs, according to an article here. The same source, highlights the size of the Pinghu investment at RMB 2 Billion (USD 298 million).
A second source here, includes some details regarding the types of vehicles to be produced at Pinghu. The mix includes both EVs and conventional vehicles (i.e. ICEs). It is interesting to note that Ora EVs will constitute the bulk (50%) of planned production, while SUVs and Pickups together, will account for the other 50%. The graph below highlights planned production at Pinghu, both by vehicle type, and brand:
More recently, last month, Great Wall announced its plans to open up yet another plant on the eastern seaboard, in the province of Zhejiang, in Taizhou city. The reported size of the initial investment is RMB 8 billion (USD 1.18 billion).
Fewer details are available about the planned production at Taizhou, however, at least one source here, highlights that the facility will produce mostly SUVs. Although Crossovers were not mentioned, given their popularity with consumers, it seems highly likely that Taizhou will be producing Crossovers as well. Parts and components for interiors and chassis will also be produced.
As 2019 progresses, it seems likely to me that we’ll learn more about the types of vehicles that will be produced at Taizhou. As a blogger that focuses mostly on China’s NEV market, I’ll be looking for signs that some of Taizhou’s production capacity will be dedicated to producing at least some SUVs and Crossovers – – that are PHEVs, or possibly even pure EVs.
Three factors almost ensure that China will be seeing more SUV NEVs on the roads in the coming years: a) SUVs and Crossovers remain a growth market, b) the government strongly supports NEVs, and c) concerns about the environment, at least for a segment of car buyers, are influencing purchasing decisions. In an insightful article here, Yang Jian, the Managing Editor of China Automotive News, touched on a) and b) above.
Great Wall’s recently announced 5-2-1 strategy, under the Haval brand, is important in this context. As highlighted here, by INSIDEEVs, the new strategy lays out both an aggressive and ambitious plan for 20 new Haval models by 2023, of which, 60 percent will be electric. The “5” in the strategy refers to a five year plan (2019-2023), the “2” stands for a global target sales volume of two million vehicles by 2023, and the “1” refers to Haval’s ambition to be number one, in the global SUV market.
Given the fierce competition that Great Wall faces, making the above plan a reality will undoubtedly be challenging. But even just achieving moderate to significant success with the 5-2-1 strategy, would yield two major and related benefits for Great Wall. First, the company would be much better positioned to compete in China’s growing NEV market, and secondly, it would address the company’s CAFC challenges and its associated high negative fuel consumption credit score.
In the mean time, as evident with the launching of its Ora brand, and as also evident by its strategic JV with BMW to produce Mini EVs, Great Wall is not standing still to meet these challenges.
If you don’t have enough credits, buy a company that does. Great Wall & Yogomo Motors.
As noted earlier, a manufacturer can remedy a negative fuel consumption credit score with MIIT by transferring CAFC credits from an affiliated company. Motivated by this approach, in September of 2017, Great Wall made a new investment by taking a 25% stake in a smaller EV producing company called Hebei Yogomo Motors. The terms of the deal include an option for Great Wall to increase its stake to 49%.
Great Wall’s 2017 Annual Report here, makes reference to the Yogomo investment. The excerpt below shows the key text, which I’ve bolded, due to its relevance to NEV credits:
The Group obtained 25% of the equity interests in Hebei Yogomo Motors Co., Ltd. (“Hebei Yogomo”) by way of capital increase in September 2017. The Group and Hebei Yogomo will recognize their respective advantages in respect of new energy vehicle and would conduct joint research and cooperate in various aspects, including but not limited to research and development of new energy technology, manufacturing and production techniques, supply of parts and components, establishment of channels and promotion of brand to achieve more economic and social benefits. The transaction will allow the Group to better satisfy the requirements of the PRC government on the new energy vehicle credits.
Similarly, in a China Automotive News Gasgoo article here, key text from the article notes:
Yogomo signed a JV framework agreement with Great Wall Motor (GWM), under which, it made a promise to sell NEV credits to GWM, … and transfer all of its positive corporate average fuel consumption (CAFC) credits to GWM.
Yogomo, as a company, has a history of making small Low Speed Electric Vehicles/LSEVs. LSEVs are often tiny in size, light, and have very limited power. However these bare bones no frills vehicles, have been very popular in China’s rural areas and smaller towns and cities, largely because of their low price. For less affluent Chinese consumers, LSEVs are valued and have great utility. They’re seen as a “step up” and an affordable alternative, to riding a bike or a crowded bus.
For a quick understanding of China’s LSEV market, I highly recommend that readers check out this fun Wall Street Journal video here. It highlights the very substantial size of this market, its appeal to consumers, and some of the challenges for regulators, who are trying to limit, or perhaps even ban, the production of LSEVs. As noted in the video, approximately 1.75 million LSEVs were sold in China in 2017, and so given the size of this market, and the popularity of LSEVs, regulators are going to have their work cut out for them.
In more recent years Yogomo (which now goes under the company and brand name “Link Tour”) has begun manufacturing regular, higher capacity EVs, such as its K-One model pictured here:
Yogomo appears to be a small, but fast moving company with big ambitions. I use the description small because in a July 2017 document here, (filed by Great Wall with the Hong Kong Stock Exchange), Yogomo’s total registered capital at the time of its 2009 founding was reported as a relatively modest RMB 100,000,000 (USD 14.771 million). Between 2009 and 2017, Yogomo, and its business, evidently grew at a rapid pace.
In a September 2017 article here, Yogomo announced its efforts to upgrade its existing facility in its home province of Hebei, with an investment of RMB 1.8 billion (USD 274.85 million). That seems like a big investment for a company that, less than a decade earlier, had registered capital of less than USD 15 million, i.e. only about 5% of the above mentioned nearly USD 275 million.
As highlighted here, in a China Automotive News Gasgoo article, Yogomo’s investment in its Hebei facility, represents a substantial upgrade. The industrial output value of the investment was estimated at RMB 5 billion (USD 738 million), annual profit and taxes were estimated at RMB 400 million (USD 61 million), while the size of the upgraded project area is 550,000 sq. meters.
Yogomo’s big ambitions, as described in an article here, include a long term target to “… become a world-leading mobility service provider and a NEV maker with market value of RMB 100 billion in 2027.” Although I think its healthy to adopt a humble attitude of – “who am I to question the ambition of others…” – – I’ve also been following China’s NEV sector long enough to know that ambition can often overshadow reality. I’m not going to make any predictions, but still, it might just be kind of fun to check back on this blog, eight years from now, to see where Yogomo stands with its 2027 market valuation ;-).
What is clearer for now is that Great Wall saw some value when purchasing 25% of Yogomo, and also thought it wise to include an option to acquire up to 49% of the company at a later date if it so desires. As noted above, in the reference to Great Wall’s 2017 annual report, a major motivating factor for Great Wall was that “the transaction will allow the Group to better satisfy the requirements of the PRC government on the new energy vehicle credits.” So given this context I thought it might be interesting to look at Yogomo’s Link Tour branded model, the K-One 400 EV SUV , and to estimate the per unit NEV credits that Yogomo generates with each K-One. Remember, with a 25% stake in the company, presumably one quarter of the generated credits go to Great Wall. It’s also important to note that Yogomo is planning five models in total, by 2019, according to an article here.
The specs of Yogomo’s K-One SUV are similar to the Ora iQ compact Crossover. The table below shows both models, and the specs. that determine their respective NEV Credit scores:
Great Wall’s R&D Center in Austria
As noted in an article here, in January of last year, Great Wall announced that it would be creating an R&D Center in Austria, to speed the development of key components for EVs. When explaining their decision to establish the new R&D tech. center, Great Wall highlighted the automotive engineering expertise in Austria, and particularly the expertise related to light weight new materials.
The planned investment in the center is estimated at RMB 157 million (20 million Euro), over a three year period (2018-2020).
The initial focus of the center will be on developing electric motors and related control systems.
Beyond batteries, Great Wall is Keen on Hydrogen and Fuel Cells
Much of the above supports the view that Great Wall is giving greater strategic importance to EVs and hybrids. Taking a longer term perspective, the company is also a proponent of hydrogen powered fuel-cell vehicles.
China’s New Energy Vehicle/NEV category (and its related policies and regulations), includes hydrogen powered fuel-cell vehicles (FCVs). These vehicles currently represent a near-zero or negligible part of the market. In comparison to electric vehicles, the technology and the infrastructure that is needed to support FCVs, receives relatively much less attention and support from the government.
Great Wall is making significant efforts to change this. The company would clearly like to see an NEV future market in China, that includes a commercially viable segment for FCVs. This is understandable, because as noted earlier, Great Wall’s CAFC and government policy compliance challenges, are not going to be easily addressed with battery powered vehicles alone. Even though batteries are getting dramatically better, range is still the issue. That would be a non-issue in an alternative future, where fuel-cell vehicles were commercially viable.
That’s a future that Great Wall is advocating for. As described here, on the company’s website, Great Wall’s Vice Chairman and President of the company, Wang Fenying, recently participated in the high level Chinese government’s National People’s Congress, where she put forth “five proposals for the future development of China’s automobile industry and the development of Chinese enterprises.” First among those five proposals was a “Proposal on Accelerating China’s Hydrogen Energy Infrastructure Construction to Promote the Comprehensive and Balanced Development of Hydrogen Fuel Cell Vehicles.”
Great Wall is doing more than just lobbying the government to promote a fuel cell vehicle future. An Automotive News China article here, from last October, provides a useful overview of many of Great Wall’s efforts. These include:
An investment in a German company, H2 mobility Deutchland, a German operator of hydrogen fueling stations.
Great Wall’s decision to take a 77 percent stake in Shanghai Fuel Cell Powertrain Co., a Shanghai-based fuel cell battery maker.
The opening of a fuel cell vehicle tech center at its headquarters in Baoding.
The company’s plans to complete the development of a fuel cell vehicle prototype in 2020, and to demonstrate a small fleet of fuel cell vehicles at the Winter Olympics in the north China city of Zhangjiakou in February 2022.
Hydrogen fuel-cell vehicles in the mainstream market, with any significant presence, are more than a few years out. Despite this challenge, Great Wall appears to be committed to doing its part to accelerate the conditions needed for broader commercial viability.
Great Wall is not alone in the Small EV market in China
Many of Great Wall’s competitors, including domestic and international manufacturers, are beginning to compete more visibly within China’s substantial market for small EVs. Often this happens indirectly, through a joint-venture (JV) arrangement, or when a larger company takes a minority share ownership stake, within a smaller company. Great Wall itself is a JV partner with a much bigger partner (BMW) – – as well as a minority share holder and partner of a much smaller company (Yogomo).
Examples of other companies, and their presence (direct or indirect) in China’s market for small EVs, are briefly described below:
- General Motors has a joint venture with SAIC and Wuling, which is known as the SAIC-GM-Wuling JV. The joint venture’s brand Baojun is successfully selling a micro two-seater model known as the Baojun E-100, (a look alike of Daimler’s Smart car).
Over 8,300 Baojun E-100’s were sold in China in January. I’ve written about the Baojun E-100 in detail, in a recent blog here. During January, the most recent month for which data is available, the E-100 finished second on a list, ranking China’s best selling EVs.
In 2017 Volkswagen (VW) created a JV with JAC (Jianghuai Auto), with a focus on the NEV market. The planned investment of the 50-50 JV is six billion RMB (USD 882 million), as noted here. JAC currently offers five models under its iEV line. The smallest is the iEV6E, a small four-door hatchback, in the A00 class.
Ford has created a JV with Zotye, a small-medium size manufacturer. Last year, Zotye sold just over 232,400 vehicles in China. Within the EV market, Zotye’s best seller was a small two-seater micro, the E200.
The JV between Ford and Zotye, is described in detail in an Automotive News China article here. A brief summary of the partnership, from the same source, appears below:
Ford Motor Co. is going all-in on electric vehicles in China, the world’s largest market for battery-powered vehicles, … The automaker said Wednesday that it finalized an alliance with China’s Anhui Zotye Automobile Co. to manufacture and sell a full line of EVs. The companies will invest 5 billion yuan ($756 million) to develop the cars they’ll sell under a new brand unique to the Chinese market.
Daimler’s Mercedes-Benz, and its electric brand, “EQ”, will be launched in China later this year.
As noted here, the first EQ launched in China will be an SUV.
Daimler’s has a long established partnership with Beijing Auto (BAIC). BBAC (Beijing Benz Automotive Co.) is a joint venture company between Daimler and BAIC.
In 2017, Daimler and BAIC announced a joint total investment of RMB five billion, (approximately 655 million euro), “for Battery Electric Vehicles and battery localization at BBAC… .”
Although we don’t know whether the EQ brand will be including small EV’s as part of its product line in China, given the success that Daimler has had with its Smart brand, a similar offering seems at least possible. An EQ concept car, two-seater micro, is shown here.
BAIC recently created a spin-off subsidiary called BJEV (Beijing Electric Vehicle).
BAIC, the parent company, owns eight percent of the subsidiary. Daimler has established a 3.93% stake in BJEV, as reported here.
BJEV has a brand called Arcfox, which produces a Mini look-a-like, the Arcfox Lite.
As reported here, both BAIC and Daimler were the two main investing institutions supporting the development of the model.
Honda is planning a small EV for China, with a battery supplied by China’s mega battery powerhouse Contemporary Amperex Technology Limited (CATL).
The two partners are reportedly working together to create a small and affordable EV based on Honda’s Fit model.
The vehicle is expected to cost slightly more than USD 18,000 and have a driving range of about 300 km.
The domestic manufacturer Kandi, is producing a small four-door hatchback under the
Global Eagle brand, a brand which is associated with Geely.
Kandi has a joint venture (JV) with the Geely Holding Group, which is the parent company of Geely Auto.
Although the K23 is being produced by Kandi, at its factory in Hainan, the expectation is that both the factory and the production of the model will be handled by the JV in the future.
For readers that might not be very familiar with China’s geography, Hainan is an island in the South of the country not far from Hong Kong and Macau. Hainan has promoted itself as an eco-friendly tourist destination, and Hainan’s provincial government has plans to eventually ban conventional cars (i.e. Internal Combustion Engines/ICEs) from the island at some point in the future. In the nearer term, the local government is cracking down on LSEVs as highlighted in a Chinese news media article here (tip: Google’s Chrome browser successfully translates this article but the page takes time to load and the translation from Chinese to English is slow; patience required). Considering that Hainan’s provincial government has been supportive of Kandi, and the development of its factory and vehicles, my expectation is that the K23 should sell well, at least in Hainan.
Great Wall’s launching of the Ora brand, represents the company’s first substantial effort to sell into China’s NEV market. Ora’s emphasis on smaller models is probably not a coincidence, because from a cost of production perspective, smaller models are most effective at earning NEV credits. These credits can be used to offset CAFC deficits. For a company like Great Wall, which is reported to have high negative fuel consumption credits, positive NEV credits are particularly valuable.
Likewise, it seems reasonable to infer, that the BMW-Great Wall joint venture to produce Mini EVs, was at least partially motivated by some of these same policy and cost-effectiveness related considerations.
Given that Great Wall’s initial 25% stake in Yogomo Motors was motivated by an interest to acquire NEV credits, it seems likely that if Yogomo begins to establish success in the marketplace with its Link Tour brand vehicles, Great Wall might easily be motivated to take a larger stake in Yogomo.
As noted earlier, Yogomo as a company has roots in the LSEV/Low-Speed-EV sector. LSEVs are particularly popular outside of China’s largest cities, in smaller cities, towns, and rural areas.
It is exactly these same areas, where China’s slowing automobile market, is hoping to find growth. Two ongoing and future developments are going to be worth watching closely. First, there is an initiative to boost consumers demand for cars outside of China’s largest cities. However, as noted in an article here, there is concern that these efforts place too much burden on local governments, with insufficient support from the central government.
Parallel to this, the central government is cracking down on LSEVs, as explained in an Automotive News China article here. Concerns about LSEV related traffic accidents and fatalities, are said to be some of the chief reasons underlying the crack down. China’s Ministry of Industry and Information Technology estimated that over a five year period, LSEVs were involved in 830,000 accidents and 18,000 deaths. The longer term goal of the crack down seems to be to stop the production and the selling of the LSEVs.
Months and probably years will be needed, before clarity emerges about the fate of LSEVs. What does seem clear though, is that the efforts to crack down on LSEVs, are certain to have an impact on the EV market in China, and particularly that segment of the market that involves small, and very small EVs. In other words, I’m referring to EVs that fall into China’s “A0” and “A00” vehicle classes. Hey wait a minute – – those are the same classes that are most cost-effective to produce – – from an NEV credit perspective. Hmmmm, interesting overlap. 😉
For a full list of references used when writing this blog; click here.
Full disclosure: I own shares in Kandi (Nasdaq symbol kndi) a company that I’m “long” on. I do not own shares in any of the other companies mentioned in this blog.
After looking at the January 2019 brand sales ranking, let’s take a closer look at which models were moving up the charts. As happened last in July 2018, Volkswagen takes the top two positions with the Golf (down 22,8%) and the Polo (up 9,1%), with the Renault Clio down to third place after three consecutive months (and the full year 2018) in second place. The Clio is down 8,9% as the next generation will arrive in showrooms this year. In fourth place we find the Toyota Yaris, equaling its personal best position also scored in September 2018. Since its launch in 2013, the current generation Yaris has consistently improved its sales every year, an impressive performance even though it’s still below the peak of the nameplate’s sales in 2007. The Volkswagen Tiguan is in fifth place, down 13,1% with the Ford Focus in sixth place for the second consecutive month, thanks to the new generation. The Fiat Panda makes a surprise return to the top-8 thanks to sales up 21,5% with all of the growth coming from its home market Italy which accounted for 81% of Panda sales in January. That leaves the Peugeot 208 down into 9th place, just ahead of its stablemate Citroën C3.
After ending on a down note in the last quarter of 2018, European car sales continue their negative trend in January 2019. Registrations of new passenger cars were down 3,9% to nearly 1,23 million sales, still above 2017 levels. Most of the decline can still be attributed to the after effects of the introduction of new fuel efficiency and emissions testing standard called WLTP (Worldwide harmonized Light vehicle Test Procedure) in September. Demand for new cars fell across almost the entire European Union, including the five major markets. Spain and Italy posted the strongest declines (down 8% and 7,5% respectively), while the United Kingdom was surprisingly stable at ‐1,6%. Germany (‐1,4%) and France (‐1,1%) also did better than average. Best performing market was Lithuania (+49%), followed by Romania (+18,8%) and Hungary (+9,2%). The only other markets to improve on 2018 were Portugal (+8,3%), Denmark (+7%), Greece (+3,7%) and Latvia (+0,7%). The biggest declines were seen in Iceland (-47,9% to just 846 registrations), Netherlands (-18,8%) and Czech Republic (-17%).
For readers with an interest in China’s New Energy Vehicle market, when the manufacturer SAIC gets mentioned, the company’s Roewe brand is probably the first brand that comes to mind.
There is good reason for this. Last year, during 2018, of the four SAIC models that made the list of China’s Top Twenty NEV sellers, three of the four carried the Roewe badge.
The exception was the Baojun E100, a micro two-seater made by SAIC’s joint venture (JV) with GM and Wuling. SAIC is the majority share holder, owning just over 50 percent of the company.
The four best selling “SAIC” models are listed and pictured below:
- the Roewe eRX5 PHEV SUV,
- the Roewe ei5 EV station wagon,
- the Baojun E100 two door micro (a product of the SAIC-GM-Wuling Joint Venture), and
- SAIC Roewe ei6 PHEV sedan.
The Baojun E100 gets an Upgrade (Baojun E200 aka the New Baojun E100).
During the second half of 2018, the SAIC-GM-Wuling JV began selling an upgraded version of the Baojun e100, which is described in a General Motors June 2018 press release here as the New Baojun E100. As noted in the release the primary aspect of the upgrade is the longer driving distance, 200 km, which is about 30% more than the previous 155 km. range.
According to another GM China news reference here, a “new” model, was launched in September of 2018. Referred to as the Baojun E200, the “new” model appears to be the same model as the New Baojun E100 that was earlier highlighted in the June 2018 press release, despite the fact that the Baojun E200 reportedly has a slightly higher driving range of 210 km. (NEDC). The lack of consistent terminology regarding model names certainly can be confusing, even for this patient blogger. What is now clear, after cross-checking multiples sources, and the details of specs, is that Baojun’s micro two-seater vehicle, that has a reported driving range of 210 km (NEDC) – – whether its called the E200 – – or the New E100; is indeed the same model. Because the model is still referred to by most sources as simply the E100, I’ve conformed to that label (E100), for almost all sections of this blog. The exception is the section or content related to carbon-credits, where I’ve sometimes used E200, because the Baojun E200 has a longer range (210 km) which matters significantly when calculating carbon credits. To make matters even more challenging, Zotye has its own e200 model, which is not to be confused with the Baojun e200. Good. Clear as mud 😉
So which model is the hottest?
Although all SAIC’s four models pictured above sold relatively well last year, only one – – the Baojun E100 – – experienced a surge in sales during the last quarter of 2018. During the last three months of 2018, nearly twice as many E100s sold as compared to SAIC’s other best sellers.
In the micro two-seater car segment, only one other model – – the Zotye e200 – – made the list of Top 20 Best Sellers in the NEV category. Both micros are similar in size and shape, as seen in side by side photo below:
Although the Zotye E200 outsold Baojun’s E100 during the third quarter of last year, in the fourth quarter, Baojun’s two seater began to clearly overtake its Zotye competitor by a wide margin as seen in the graph below:
While we don’t know exactly what contributed to the Baojun E100’s dominance during the fourth quarter of 2018, a number of factors or developments are worthy of consideration:
- Prior to mid-2018, the geographic market for the Baojun E100 was limited to Guanxi province, a southern province bordering Vietnam. However, in June-July of last year, Baojun began expanding the E100’s market by selling the two-seater in the Northern province of Shandong, in the area of Qingdao.
- The map on the left below shows a zoomed out view of Guangxi and Shandong (see red rectangles), as well as the location of Shandong’s Qingdao city. The map on the right shows a zoomed in view of Qingdao – – which as a matter of interest – – includes a nearby Zotye “New Energy Dealership.”
- In all likelihood, numerous factors led to Baojun’s decision to sell its E100 in the Qingdao region. It seems plausible that the opportunity to compete directly with Zotye’s E200 was at least one such reason.
Baojun’s entry into the Qingdao market during the second half of 2018, most likely contributed to the E100’s success during the Oct.-Dec. period (see graph above), when Baojun’s E100 decisively began to outsell Zotye’s E200.
Although the graph pertains to national level sales, we know that prior to the third quarter of 2018 the E100’s market geography was limited to Guanxi province in south China. Given that Baojun’s E100 entry into the Qingdao market did not begin until June-July, and considering that it normally takes a few months before sales volume for a successful product begins to ramp up in a new market- – it seems reasonable to suggest that the Baojun E100’s expansion into Qingdao likely contributed to the large rise in sales volume during the fourth quarter of 2018.
Baojun as a brand is known historically for its success outside of China’s largest cities; in other words in China’s more rural areas or in smaller towns and cities. Qingdao is one example of a second tier city. These market geographies, because of their lower rates of car ownership, and their associated higher rates of sales growth, are attractive to not just Baojun or Zotye looking to expand their business, but to virtually all the major OEMs, whether domestic (like SAIC and Geely) or international OEMs such as GM, Ford, or VW. As a case in point, Ford, together with its joint venture partner JMC (Jiangling Motor Co.), is expected to launch a new SUV (the Territory), into the Qingdao market during early 2019, as noted in the article here.
GM already has an established presence or foothold in China’s market for micro EVs, because of the earlier mentioned SAIC-GM-Wuling joint venture; which owns and produces the Baojun brand.
Small NEVs in China and rapid growth. Why?
China’s New Energy Vehicle/NEV market grew by 62 percent year-on-year (2018 vs. 2017), with 1.25 million NEVs sold during 2018. As noted in a China Daily article here, 2019 sales are expected to reach 1.6 million. Within the NEV segment, small vehicles, meaning micros and compacts, are selling best. China’s government refers to these small vehicles as “A00” or “A0” type cars. Within this context “micro” is synonymous with A00, while the slightly bigger, but yet still small “compact”, is roughly synonymous with A0.
In general, its hard for OEM’s to make money selling small, inexpensive vehicles, with very thin profit margins. Its even harder with electric vehicles, which is why governments subsidize them. When the occasional or rare scandal occurs (i.e. a subsidy recipient/OEM committing fraud to improperly receive subsidies) as happened in a few limited cases in China in recent years, this can further delay government subsidy payouts to all OEMs – – including the vast majority which are innocent of any wrong doing. When government subsidies are late, or unreliable, OEMs feel the squeeze, in terms of their corporate balance sheets, cash flow, or profits.
So how is it possible, that despite all of the challenges mentioned above, China’s market for NEVs – – and especially small pure EVs (vehicles powered by batteries only) – – has been experiencing rapid growth during recent years and months?
Much of the growth is a result of the both “carrot and stick” approach that China’s government is using to promote the transformation of China’s automotive market and industry, away from its current and historical reliance on traditional/conventional cars (Internal Combustion Engines/ICEs) and towards much greater reliance on EVs and hybrids (New Energy Vehicles). But that transformation is expensive, and China’s government would like to shift that expense away from public coffers, and towards the OEMs.
This year 2019, marks an expected transition, meaning that later this year China’s long anticipated carbon-credit trading system for the automotive sector is due to begin. This will have major implications not only for companies like SAIC, GM, Baojun, Zotye etc. – – but for all manufacturers in terms of their production, and more specifically, the mix of their output regarding ICEs and NEVs produced. In short, manufacturers will have three choices:
a) produce more NEVs to meet quotas, that are specific to each manufacturer, as determined by the new regulations,
b) don’t meet the quotas but comply with the policy by purchasing carbon-credits from other NEV producers (i.e. competitors) whom have earned surplus carbon credits,
c) face stiff and costly fines and penalties for doing neither a) nor b) above.
Bloomberg’s New Energy Finance team has created an innovative EV Exposure Index to reflect the “readiness” of OEMs for EVs. As seen below, the Chinese OEMs BYD and BAIC score high or “most ready”, because of their high production rates of NEVs. On the other end of the spectrum, manufacturers with low ratings include Toyota, Fiat-Chrysler, Honda, and Subaru. As seen in the graphic below, GM and Ford have readiness index scores that are a bit higher, however still low, relative to NEV industry leaders.
GM’s partnership with SAIC and Wuling, via their JV, is interesting to examine, from the perspective of – – “What’s in it for GM?” In a very insightful 2017 commentary article here (Thriving Baojun bodes well for GM’s future in China) the Managing Editor of China Automotive News, Yang Jian, addresses this question, and highlights some important strategic considerations. Some excerpts from Jian’s 2017 commentary appear below:
Baojun is successful because it has never lost its focus on entry-level car buyers. The brand targets customers in rural areas and small cities in China where the main competition is domestic Chinese brands.
it (Baojun) has been given a new goal: Help GM expand into China’s EV market to meet Beijing’s production quotas. In 2019, the government will introduce a California-style carbon credit trading program to goad automakers to ramp up output of EVs and help curb emissions and pollution.
In response, Volkswagen and Ford each have formed new joint ventures with Chinese EV makers to build small, affordable EVs. GM doesn’t have to do this, because Baojun has access to an entry-level market that Ford and VW have never tapped.
To be sure, Baojun doesn’t boast the profit margins of Buick or Cadillac (two other important GM brands in China). Starting prices are below 70,000 yuan ($10,600), but manufacturing costs are modest, too, so Baojun is a money maker.
Readers should keep in mind that the excerpts above are from a December 2017 article, when Baojun’s business was thriving. As noted in a much more recent February 2019 article here, business for GM’s two joint ventures in China, SAIC-GM, and SAIC-GM-Wuling have taken a downturn, with sales declining significantly during 2018.
Back in November of 2017, GM’s China Chief, Matt Tsien, quoted in a Reuters article here, expressed his confidence, in GM’s ability, and the abilities of its JV partners to meet China’s NEV quotas, which begin this year. The accompanying photo to the Reuters article showing Baojun’s E100 assembly line, represents a good example of the old saying “a picture is worth a thousand words.”
So given much of what’s been presented above, I thought it would be interesting to start taking a look at OEM’s and their ability to generate carbon credits, using the Baojun E100 as an example. Although we won’t be able to get a solid understanding of the more important question – – (i.e. “How much financial value are the carbon-credits going to be worth?”) – – it still seems timely, given the expectation that China’s carbon-credit trading system will be launched sometime this year, to begin looking more closely at OEMs, and their ability to generate carbon-credits.
For readers that are interested in the details of how carbon-credits are calculated, the International Council on Clean Transportation (ICCT) has produced an excellent Policy Update (January 2018) titled China’s New Energy Vehicle Mandate Policy (Final Rule), which is the source I used for estimating carbon credits within this blog.
How Many Carbon-credits are earned for producing one little Baojun micro two-seater?
Below is a table that approximates the carbon-credits that the SAIC-GM-Wuling joint venture will earn, for the production of a Baojun E200 vehicle. As a reminder, readers might wish to revisit the earlier section above (see “The Baojun E100 gets an Upgrade” for an explanation of Baojun model numbers, E100 vs. E200 etc.).
Carbon credits for pure EVs are capped at six credits; irrespective of Base Score and Adjustment factor. Six credits is the maximum number of credits that any pure EV can earn. The ICCT Policy Update includes helpful graphics that illustrate how the adjustment factor is determined, depending on a given vehicle model, and its specs., in terms of energy consumption, and the mass or weight of the vehicle. I’ve annotated the original ICCT graphic below, by inserting the Baojun E200 into the picture:
In addition to the micro two-seater E200, SAIC will be earning carbon-credits from its other NEV models. I thought it would be interesting to look at how many carbon credits the various SAIC NEV models (i.e. 2018 best sellers) would generate, on a per unit basis, which is shown in the table below.
It is important to note that there is a separate and distinct method for calculating carbon credits for PHEVs – – and that method is different than the method used for pure EVs.
For PHEVs the associated carbon-credit is either two or one, depending on whether an adjustment factor is applied. As seen in the graphic below, PHEVs with certain specs. are adjusted
downwards/lower with regards to their carbon credit value, by applying a multiplier of 0.5 to their base value of 2. For such cases, the result is a carbon credit score of 1.
This method applies both for:
- PHEVs that have an electric range of 80 km. or higher, and
- PHEVs with an electric range of less than 80 km.
For PHEVs with electric ranges above 80 km. – – energy consumption (kwH/100 km.) is used together with curb mass (kg.) to determine the adjustment factor. Alternatively, for PHEVs with electric ranges below 80 km., fuel consumption, as measured by L/100 km., is used. These methodology specifics are more clearly illustrated in the graphic below. The SAIC Roewe eRX5 is used as an example in the bottom most graph. The eRX5 SUV has a carbon credit score of 2, due to its electric range of < 80 km., its fuel consumption rating of 1.6 L/100 km, and its curb mass of 1730 kg.
The table below shows all four of SAIC’s 2018 best selling NEVs, and their estimated carbon credits, using the appropriate method either for pure EVs, or for PHEVs:
It’s clear from the table above that SAIC’s pure EV models generate more carbon-credits, on a per unit basis, compared to PHEVs. This reflects Chinese government policy, which favors pure EVs. If we look at the first two models in the table above, we see that selling one ei5 EV wagon, generates over five credits, more than twice the credits generated from selling one ei6 PHEV sedan.
The value of the credits won’t be known for some time, given that the NEV carbon trading system is yet to be launched. Even after it has been launched, it will likely take many months before an established trading range and market value for a carbon credit gets established.
Nevertheless, it seems reasonable to expect that the value of future traded carbon-credits will have at least some impact on the production, marketing, and selling behavior of automotive OEMs that will have to comply with the new policy and regulations. As suggested later in this blog, there might already be evidence that this is happening, with Baojun’s ramp up in sales, of the Baojun E200.
Profit margins and market demand (sales volume during recent months), are likely the most important variables that will determine future marketing and sales efforts for any given model. At the model level, profit margins are unknown, however sales volume data are available, and during the last quarter of 2018, 7,243 ei6 PHEV sedan were sold, while slightly fewer ei5 EV wagons (6,781) were sold. The sedan is priced somewhat higher than the wagon, and so for that reason alone we might expect profit margins to be higher. However, as illustrated in the first two rows of the table above, more than twice as many carbon credits are generated by producing the pure EV wagon, relative to the PHEV sedan.
Although I’ve used SAIC within this blog as a convenient means for exploring carbon-credits, ultimately, I’m interested in the bigger questions that will effect the industry and the environment – – such as:
- How will China’s expected 2019 NEV carbon-credit trading system impact OEM business decisions, about what types of cars to produce, in what quantities, with what profit margins?
- How valuable, influential – – or not – – will carbon-credits be – – in terms of their 2019-2020 (and beyond) impact on automotive OEM business decisions?
- More specifically, how will carbon credits impact corporate balance sheets and income statements, in terms of revenues generated, or if the credits get accumulated for a period of time (and not sold, or traded in the carbon market) does the value of those accumulated and held credits impact the value of the business or the corporate entity?
- To what extent will China’s policy push for NEV related carbon-credits – – in the long run, be a success or failure? After years or decades of implementation, how will the policies be viewed – – as significant or major contributors to cleaner air, less carbon in the atmosphere, a healthier China, a healthier world, and a changed automotive industry at national and global levels – – or not? Obviously, we’ll have to be patient, it will take years or decades – – before those questions begin to get answered.
In the short run, over the course of this year, we might more realistically point our efforts towards obtaining a better understanding of more concrete and near-term matters. For example, matters related to specific OEM businesses, or an industry sector, such as China’s automotive domestic OEMs. Unfortunately I’m not an accountant, nor do I have much experience analyzing balance sheets or income statements within this context of China’s changing automotive industry; so if there are a few accountants that might be reading this blog “out there”, or really any readers that might be able to shed light on these questions – – please don’t hesitate to use the comments section below, to shed new light on the questions raised above.
In the meantime I could not help but notice, that just a few days ago Jose Pontes, via his blog, EV blogspot, has shared new sales volume data for China’s January 2019, NEV best sellers. Thank you Jose! As acknowledged in the blog and comments, there are numerous challenges regarding data quality and data reliability, so users of this data are wise to take note. With that disclaimer, I do think it’s interesting that according to this source, January sales of the Baojun E100, are reported to be a whopping 8,312 units/cars. If confirmed, this would indeed make for a dramatic rise from the 4,692 units (up 77%) reportedly sold in December 2018. Sales volume for the last four months is shown in the graph below:
With the exception of a slight dip in December, Baojun’s micro, which perhaps should be renamed as the “mighty micro”, or something more fitting, appears to be selling well.
As mentioned earlier, Yang Jian, the managing editor of Automotive News China, noted more than a year ago, back in December of 2017, that Baojun has been given a new goal:
- Help GM expand into China’s EV market to meet Beijing’s production quotas. … (related to) a carbon credit trading program to goad automakers to ramp up output of EVs and help curb emissions and pollution.
That mission, seems to be right on track, as visualized in the graph above. More E100’s are not only being produced, but they also appear to be selling.
It will be interesting to see whether the Baojun E100 sales volume continues to rise, during the coming months.
From this blogger’s perspective, it will be even more interesting to witness the launching of China’s carbon-credit NEV trading system, and subsequently as this year progresses – – how the price of a credit evolves over time.
Even before that price gets established, there seems to be mounting evidence, that China’s policy is already beginning to have at least some of the impact – – that it was designed to have.
For a complete list of sources and references used in this article; click here.
Full disclosure: I do not own any shares in SAIC, or any other company mentioned in this blog.
Guangzhou Auto Corp, also known as GAC, is not your father’s typical State-Owned-Enterprise (SOE).
When you think of China’s auto sector and State-Owned-Enterprises (SOEs), what descriptions typically come to mind? Dynamic, innovative, fast-growth? Perhaps not.
Think again, because at least one such enterprise, Guangzhou Auto (aka GAC), is breaking the stereotypes. GAC would appear to be “that kind of company”; meaning dynamic, innovative, and definitely fast-growth – – especially, when compared to other “peer” SOEs.
GAC ranked 46th in terms of revenues growth, on The Forbes Growth Champions List 2018 Ranking which listed the fastest growing publicly traded companies around the world.
To help put GAC’s standing into perspective, the table below provides examples of other companies and their respective rankings:
The only domestic competitor above GAC was Geely, the number one domestic OEM in China. GAC’s revenues have been growing at a faster clip than both BAIC and BYD. BAIC, also a State Owned Enterprise, is the only other auto SOE that made the list.
Within China’s massive market, its electric vehicle sub-market is growing fastest. Also known as the New Energy Vehicle/NEV market, this segment grew by 62 percent year-on-year with 1.25 million NEVs sold during 2018. As noted in a China Daily article here, 2019 sales are expected to reach 1.6 million.
Although none of GAC’s NEV models were among the Top Twenty Selling NEVs in China; GAC has had at least some success in the market with its SUV PHEV, the GAC Trumpchi GS4, pictured below:
Over 10,900 GS4 PHEVs were sold during 2018, and momentum behind such sales grew on a quarterly basis:
The GS4 PHEV was first launched in June of 2017. During its first six months on the market, 1,863 vehicles were sold. Nearly as many (1,781) were sold in December 2018 alone.
The “after subsidies” price of a GAC GS4 PHEV in China is about 185,800 RMB ($27450). When running purely on its 12kWh battery, the SUV has a maximum range of 58 km. (36 miles). The GS4 has a top speed of 180/kmh (112 mph), and a range of about 240 km. at 60 kmh constant speed. In terms of price and many of the specs. highlighted above, the GS4 PHEV is similar to BYD’s Qin PHEV. The Qin PHEV was recently reviewed in the blog titled BYD Leads China’s EV Market. Although we don’t know for sure whether Chinese car buyers were viewing these two models as natural competitors, we do know from sales volume data that for every one GAC GS4 PHEV sold, BYD sold four Quin PHEVs.
GAC and its Joint Venture Partners: Imitation is the sincerest form of flattery
One development that is particularly interesting about GAC’s SUV PHEV is that a number of GAC’s joint venture (JV) partners have begun selling the same model, or an EV variant, using their own respective badges. Examples include the Toyota ix4 and the Mitsubishi Eupheme. Both Honda and Fiat-Chrysler (FCA) are following this approach with their own respective versions of the GAC GS4.
So why is it that four major international OEMs are copying GAC with the same car, same model, but using their own respective badges? As explained in the Bloomberg article The Car That Will Help Big Automakers Game China’s New Rules, this unusual strategy is driven by a number of factors:
- Government regulations require manufacturers to meet higher fuel economy standards,
- Beginning this year, OEMs are subject to new policies and regulations designed to address air pollution, carbon emissions, and global warming through the promotion of NEVs. Each OEM that produces more than 30,000 cars per year will have to earn carbon-credits through the production of NEVs, or alternatively; purchase credits from competitors that have surplus credits to sell.
- Many OEMs need additional time before their own NEV product offerings are ready for the market. Partnering with GAC, and selling GS4 variants, effectively buys additional time.
GAC in the USA?
GAC has the ambition to break into the American market. In an excellent Automotive News China article by Yang Jian, (What has emboldened GAC to enter the U.S.?) Yang explains the historical and cultural context underlying GAC’s confidence, and the companies entrepreneurial spirit. The company’s headquarters is Guangzhou, a port city, with a long history of foreign trade and a strong culture that supports entrepreneurship. Since GAC’s founding in 1997, the company’s confidence is grounded in actual past achievements which required some risk-taking, a behavior not normally associated with China’s auto-state-owned -enterprises. That risk-taking has paid off. During its early more humble years, GAC’s main business was producing and selling motorcycles and small buses. It wasn’t until 2010 that GAC started producing its first passenger vehicles. That’s right – – you’ve read that right – – the company that now has major joint ventures with Toyota, Honda, Mitsubishi, and FCA – – as well as its own successful and growing domestic brand (Trumpchi) – – has been producing passenger vehicles for less than a decade. Pretty impressive.
The company is expanding its entrepreneurial spirit in numerous directions. These include efforts to enter the US market, as well as efforts to expand its New Energy Vehicle business in general.
GAC’s ambition to establish itself in the American market is not new. As far back as 2013, GAC made its first debut at the Detroit Auto show, as highlighted in an article here. More recently, the company attended the 2019 show and displayed its EV concept car, the Entranze, as pictured below:
Perhaps more importantly, in an effort to engage with dealers, GAC recently attended the North American Dealers Association (NADA) conference in Las Vegas, where meetings were held with 80 dealers and partners. Although GAC had planned to enter the US market this year, that timing has recently been adjusted to mid-2020, as noted here. Trade tensions and tariffs between the US and China have contributed to the delays.
Back home in China, GAC is aggressively pursuing its ambitions to expand its NEV business. Last year, during the first 10 months alone, GAC sold 13,928 NEVs under the Trumpchi brand, according to an article here. While that’s not a large number when compared with other peer competitors like BYD or BAIC, it does, nonetheless, represent a more than doubling of sales from the 5,246 NEV units sold by GAC in 2017. In general, GAC’s new energy sales volume has been on a steady rise upwards over the last three years, as seen in the graph below:
During 2018 GAC’s Trumpchi conventional cars (i.e. cars powered by Internal Combustion Engines) still represented the overwhelming percentage (97%) of vehicles sold under the Trumpchi brand. Accordingly, new energy vehicles with a Trumpchi badge represented only 3%. By 2020, GAC hopes to raise that figure to 10%.
A number of investments, partnerships, and innovative projects are designed to move GAC closer to that goal. One innovative project involves the establishment of a “New Smart Energy” Automobile Industry Park, located in the Guangdong-Hong Kong-Macao Greater Bay Area. GAC and partners have invested 4.5 billion RMB ($670 million), and the total “planning capacity” of the plant is 400,000 vehicles per year. At this facility, solar energy will be used in the manufacturing of new energy vehicles. According to a December 2018 article here, “the first model (Aion S) will be put into mass production in next May, (i.e. May 2019), and it will become the world’s first pure electric vehicle based on solar energy technology.” The park will be partly powered by 52,000 solar (PV) panels. When running at full capacity, the solar energy represents 15% of the plant’s energy needs.
GAC recently released a press release regarding the Aion S, and like so many other newcomers and challengers to Tesla, the language from the challenger was direct and pointed, with the headline reading “GAC NE’s New EV Sedan Travels Further Than Tesla Model 3.”
According to the GAC press release, “the Model 3 Long-range version delivers 310 miles (499 km). However, GAC NE’s Aion S can run up to 392 miles (630 km) on a single charge, making it the best performing EV sedan so far.”
Not everyone is convinced that GAC’s claims of a longer range are valid, due to a lack of specificity regarding the “test cycle” used when making the claim, as noted in an article here.
Other recent developments should support GAC’s efforts to break into the American market or to become a more serious contender in the NEV space. These include:
Establishing a new regional headquarters in California. The focus will be on branding, marketing, product planning, and also design and R&D operations in the state.
Establishing a 50,000 sq. foot R&D facility in Farmington Hills Michigan, near Detroit. Engineers from both the Michigan facility and the California facility will collaborate on new product development.
Creating two joint venture partnerships with Contemporary Amperex (CATL), China’s large battery manufacturer. The purpose is to ensure GAC’s battery supply, both for its domestic brand, as well as for its joint ventures with international OEMs. The value or registered capital of one of these ventures is 1 billion RMB ($148 million), while the value of the other is not known. For more details about both, click on the Automotive News China article here.
Investing 650.1 million RMB ($96 million) in a New Energy Vehicle Project known as “A20”.
Although little is known about the A20 project, it seems safe to suggest that it is R&D related and that its intent is to contribute to GAC’s future competitiveness in the NEV market.
GAC’s presence in California and Michigan is very recent. As such, it is too early to tell what types of impacts these investments might eventually have.
From a nearer term perspective, GAC’s Aion S is scheduled for launch in May of 2019, and industry observers (including this one) will undoubtedly be looking for signs of traction and market acceptance, during the 2nd and 3rd quarters of this year. Stay tuned.
As emphasized earlier in this piece, GAC truly is a unique and atypical state-owned-enterprise in China’s auto sector. Its track record of fast-growth, entrepreneurial spirit, and innovative culture, clearly makes it a company worth following during 2019, and well beyond.
For a complete list of sources and references used in this article; click here.
Full disclosure: I currently do not own shares in GAC or any other company mentioned in this article.
After looking at 2018 European car sales by manufacturer and brand, let’s take a deeper look into how individual models sold last year. It shouldn’t come as a surprise that the Volkswagen Golf is still the dominant leader in Europe, for the 11th consecutive year. However, the Golf was the biggest loser in the top-18 with a loss of 7,6%, which translates to roughly 37.000 fewer sales. [Read more…]
Last year BYD sold more New Energy Vehicles/NEVs than any other company in China. According to a ranking of the Top Twenty Selling NEVs in China, BYD sold more EVs and PHEVs than any other manufacturer. Cumulatively, the company sold 205,800 NEVs and dominated the list (see below) by placing 2nd, 4th, 6th, 8th, and 9th among the top twenty.
Top 20 Selling EVs/PHEVs in China
December 2018 and 2018 (full year)
BYD Quin PHEV (Gen I and II)
JAC iEV S/E
BYD Song PHEV
BYD Tang PHEV (Gen. I & II)
BYD Yuan EV
SAIC Roewe Ei6 PHEV
Geely Emgrand EV
SAIC Roewe Ei5 EV
SAIC Baojun E100
SAIC Roewe eRX5 PHEV
Donfeng Junfeng Skio
BYD’s best sellers included two sedans, the Quin PHEV and the more recently launched e5 450, also known simply as the e5. The price of a Quin PHEV in China is about 185,900 RMB ( approx. $27,600). With a top speed of 185 km/h (115 mph) and the ability to accelerate from 0-100 km/h in just under 6 seconds, the Quin PHEV (pictured below) does not lack in terms of power. When running purely on its 13kWh battery, the sedan has a maximum range of 70 kms.
Inside the car is a 12.3 inch screen with access to navigation systems, multimedia entertainment, and real time fuel economy information.
A number of convenience factors are built in, including smart-key functionality, tire pressure monitoring, and the ability to remotely control the car from outside the vehicle – – for example – – in low speed mode, while positioning or guiding the car into a parking space.
BYD’s other best seller is the e5, a pure (battery only) EV sedan which was originally launched at the 2015 Shanghai motor show. Partly because of its affordability, the e5 has been a popular choice among taxi cab operators.
The “after subsidies” price of the e5 in China is 140,000 RMB (approximately $20,760). The sedan has a fairly long range of 405 km. (253 miles) and a maximum speed of 130 km/h or 81 mph. The battery capacity is 60.48 kWh, and can be fast-charged to an 80% level in 90 minutes.
Inside is a fairly small touch screen, allowing access to the navigation system, multimedia entertainment, internet connectivity, etc.
BYD is a pioneer in China’s NEV industry, yet is often known by Westerners as “the Chinese Electric Vehicle company that Warren Buffet has invested in.” The company makes both NEVs as well as conventional cars (i.e. cars powered by the Internal-combustion engine/ICE). For the year 2018, BYD sold more conventional cars in China (281,991) than NEVs (225,136), however, the gap between these vehicle types is closing. Last year represented a major rise in the number of New Energy Vehicles sold by BYD, while sales volume for conventional cars continued to drop, as can be seen in the graph below.
Within the NEV category it is also interesting to look at the breakdown between EVs and PHEVs, to get a better understanding of growth rates and trends. During the last two years, pure electric vehicles have surpassed Plug-In Hybrid Electric Vehicles (PHEVs), as a percentage share of BYD’s NEVs sold. The growing importance of pure electric vehicles (EVs) can be seen in the graph below.
From a more macro perspective, this year (2019) marks a major development for the automobile industry in China because car manufacturers will be required to comply with new government policies and regulations designed to address air pollution, carbon emissions, and global warming. This will have major implications not only for BYD, but for all manufacturers in terms of their production, and more specifically, the mix of their output in terms of ICEs and NEVs produced. For an excellent overview and explanation of what the new policies and regulations mean for the industry and manufacturers, readers will want to consult the Bloomberg quicktake article “China is About to Shake Up the World of Electric Cars.” In short, manufacturers will have three choices:
- produce more NEVs to meet quotas, that are specific to each manufacturer, as determined by the new regulations,
- don’t meet the quotas but comply with the policy by purchasing carbon-credits from other NEV producers (i.e. competitors) whom have earned surplus carbon credits,
- face stiff and costly fines and penalties for doing neither 1) nor 2) above.
BYD, as a long established leader in China’s NEV market is well positioned to not just comply with the new government policy and regulations, but to generate substantial revenues from selling its surplus carbon credits on the carbon market. Such revenues would be particularly valuable to a company like BYD, or any manufacturer for that matter, because they contribute directly to the company’s bottom line profits and corporate value.
Within the context of China’s new policies and regulations, not all manufacturers are so well positioned as BYD. As seen in the Bloomberg graphic below some of the giants of the industry, for example Toyota, Ford, and General Motors; appear much less prepared. The score shown below is an EV Exposure Index, created by Bloomberg’s New Energy Finance team, which “rates car makers for their readiness for electric vehicles”.
BYD’s success producing and selling NEVs extends beyond sedans, SUVs, crossovers, etc.; or what we normally think of with regards to “passenger vehicles”. One area where BYD has been particularly successful is in the bus business, and more specifically producing and selling electric buses. BYD has delivered more than 35,000 electric buses globally, and has factories around the world in countries such as the UK, France, Hungary, Brazil, and the US.
Financially, 2018 has been a difficult year for BYD. Although full year 2018 financial results are not yet reported, based on BYD’s 2018 Third Quarterly Report here, it is clear that relative to 2017; profits for 2018 will be significantly lower.
BYD attributed lower expected profits to intense competition, as well as lower government subsidies, according to a Reuters article, which noted that 2018 profits could fall by about a third compared to the previous year.
Despite these challenges, BYD as a company ended its third quarter of 2018 sounding enthusiastic and bullish about its NEV business, and its future. BYD’s third quarter report included a “Forecast on the Results of Operations in 2018”. Below is an excerpt from that forecast:
The new energy vehicle business of the Group is expected to continue to maintain strong growth and drive the rapid recovery of the profits of the Group in the fourth quarter. In respect of new energy passenger vehicle segment, new models have accumulated a large amount of orders relying on their strong market competitiveness and their sales are expected to record significant increase compared with the same period of last year due to the easing of battery capacity bottlenecks.
Battery capacity bottlenecks, appears to be a reference to BYD’s battery supply chain, which it continues to invest heavily in. These investments involve not only new battery plants and factories, but also the rights to a guaranteed supply of lithium, from mining operations. Consider the following:
In January of 2018 Chinese media outlet Xinhua reported that BYD has signed a deal with a mining operation in Qinghai province to secure a supply of 30,000 tonnes of lithium carbonate.
In June of 2018, BYD’s opened its third battery plant, also in Qinghai province. The plant’s annual capacity is 10 GWh. The cost of BYD’s new factory is 4 billion RMB, or approximately $633 million dollars.
In August of 2018, BYD signed an agreement with the local government of Chongquing in Southwest China, to build a new battery plant at a cost of approximately 10 billion yuan, or $1.5 billion dollars. The Chongquing plant will have an annual capacity of 20GWh.
In September of 2018, BYD announced its plan to build yet another battery factory in Xi’an, the capital of Shaanxi province. The annual capacity of this facility will be 30GwH, according to an article here, by electrive.
With the three new battery plants referred to above, BYD will have a total of five battery plants in China, making the company a major player in the battery business.
In addition to BYD, the other major Chinese owned battery manufacturer competing for dominance in China is Contemporary Amperex Technology/CATL, which like BYD, has been growing in leaps and bounds in terms of its new or planned battery manufacturing capacity. BYD is planning to reach a total capacity of 60 GWh by 2020, while the corresponding figure for CATL is even higher at 88 GWh.
Benchmark Minerals, a company that specializes in the lithium ion battery supply chain
has recently produced an excellent analysis that poses the following rhetorical question: Who is Winning the Global Lithium Ion Battery Arms Race?
The graph to the left shows the Top Five Lithium ion Battery Producers by Capacity. Both CATL and BYD rank 2nd and 3rd respectively – – behind South Korea’s LG Chem, the global front-runner – – and ahead of Japan’s Panasonic and America’s Tesla – – two better known name-brand competitors.
Although most of the batteries produced by BYD’s factories will likely be inputs into its own cars, some of these same factories will also be supplying other automobile manufacturers – – including BYD’s real or potential competitors. For example, in March of 2018 BYD announced that it would be supplying Changan Auto, as reported here, in an Automotive News China article.
Much of the content above suggests that BYD will continue to ramp up its production and sales of New Energy Vehicles. Given the dynamic and innovative nature of the company, BYD will undoubtedly be an interesting player to watch during 2019, and well beyond.
For a complete list of sources and references used in this article; click here.
Full disclosure: I currently do not own shares in BYD, or any other company mentioned in this article.