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Are NEV Joint Ventures a Great Scourge?

Date:06-12 12:33 Authour:He Lun

——Auto Market Hotspots Q&A (129)

Recently we have seen a whole series of breaking news items. On June 1st, JAC and Volkswagen signed an agreement on establishing a new energy vehicle (NEV) joint venture with a shareholding ratio of 50:50, which broke the restriction that one foreign automaker should not have more than two automobile joint ventures in China. With the signing of the agreement, Volkswagen has become the first foreign automaker involved in three passenger vehicle joint ventures in China. On the same day, Daimler AG signed a framework agreement with BAIC, planning to become a shareholder of BAIC BJEV. Also, according to Handelsblatt, the Chinese government will probably delay the electric vehicle quota by a year for German automakers only. These news stories are all causing a considerable stir in the Chinese auto industry.

Are NEV Joint Ventures a Great Scourge?

Q: Some experts think that this wave of NEV JVs is just repeating China’s original “market for technology” mistake, and that the huge investment made and the technologies and experience gained by the Chinese government and Chinese automakers over the past decade will all be in vain. It’s like trying to overtake on a corner only to find yourself in the roadside ditch. What do you think?

A: 16 years ago, when China joined the WTO, local carmakers were crying that “the wolves were at the door”. But now it’s the turn of the multinational carmakers to cry (see the articles: The ‘Chinese Wolves’ Are Coming…Time for Chinese Brands to Go on Their Own).

The argument that the market-for-technology strategy was a failure is past its sell-by date. It has already been proven wrong by the rise of some Chinese brands and some great R&D successes achieved by the joint ventures (see the articles “Unexpected Result’ of Market for Technology”, “Independent R&D Shouldn’t Seek Quick Success”, “SAIC-NAC Giant: A Result of the 30-year Market for Technology Strategy”, “Let Geely Show You What Is the Real Core Technology”, “The New Sail: Finally A Product of ‘Market for Technology’”, “Conception Is Still Backward 10 Years after China Joined the WTO”, “Are JVs Really Importing Poor Engines?” and “An Overview of the 30-year Sino-Foreign Cooperation on Automobile: Please Look Rationally at Multinational Auto Giants”).

The biggest problem for those who believe in the “failed strategy” argument is that their expectations of quick success are too high. They cannot understand that it takes time to develop automobiles (see the articles “Don’t Associate Automobiles with Patriotism”, “SAIC Finding Its Own Way” and “It Takes at Least Three Generations of Products for Local Brands to Rise”). Some Chinese brands are already on the rise, and even starting to surpass some JV brands in terms of product quality, design and technology, while their cost base is much lower than the JV brands. As a result, they are gradually eating into the markets of the Korean and French cars, and also posing a potential threat to the Japanese, American and Germans. In this light, it’s quite funny that anyone is still sticking to that old argument.

Traditional vehicle joint ventures did not kill Chinese brands, and NEV joint ventures won’t either. As a matter of fact, NEV joint ventures have existed in China for a long time, like Shenzhen DENZA New Energy Automotive established by Daimler AG and BYD Auto. What kind of threat has this posed to Chinese-brand NEVs? After 5 years in operation, Denza is still struggling for survival, in sharp contrast to the booming sales of BYD NEVs. In comparison, BYD has not made any money from Denza, but it has learned the strict approach and obtained advanced manufacturing processes from its German partner (see the article “Where Are These Auto Parts from?”). Besides, there are traditional vehicle joint ventures who produce NEVs. For example, Brilliance BMW launched its own-brand Brilliance BMW Zinoro 4 years ago, but it is currently on life support. What kind of threat will it offer to Chinese-brand NEVs?

As for the issue of “overtaking on a corner”, this is the most illogical concept in the Chinese NEV field – since we are all on the same starting line, why should we be left behind on a corner, forcing us to overtake?

Years ago when the NDRC had a requirement (which was not in writing) that joint ventures must produce NEVs, the same group of people were also up in arms. Unfortunately, even with the rigid requirement from the government, joint ventures have still not performed in the NEV field. In contrast, Chinese brands seized the opportunity and achieved good sales. Why should new NEV joint ventures approved by the government today make any significant difference to this situation?

Are NEV Joint Ventures a Great Scourge?

Q: Now that there are NEV JVs in China, will Chinese automakers grow dependent on their foreign partners and lose the motivation to develop their own cars?

A: GAC started out as a joint venture, but it still has a strong motivation to develop its own cars. Its local brand GAC Trumpchi is highly profitable. The joint ventures of SAIC are also strong, but does that mean SAIC has no motivation to conduct independent R&D? The newly-launched Roewe ERX5 has a range of 425km, which is the longest among domestic SUVs. Its battery has UL2580 (safety standard) certification and IP67 (dust proof and water proof rating) and Roewe guarantees that it will degrade by less than 30% up to 8 years and a mileage of 20,000 km. In fact, the Roewe ERX5 is the first pure electric SUV that has dared to offer a guarantee on battery degradation. Zhu Jun, Deputy Director of SAIC Technology Center and GM of Shanghai E-propulsion Auto Technology, said “My boss was behind me with the big stick, so I had to do it.” Is that not motivation enough?

In addition, the ERX5 is also equipped with a globally advanced connected vehicle system, but its price is still quite competitive. Matthias Müller, CEO of Volkswagen AG, personally acknowledged that SAIC has great strength in the internet of vehicles, and plans to seek cooperation with SAIC in NEVs and connected vehicles (see the article “Müller: SAIC-Audi Cooperation to Continue and Volkswagen to Become a Chinese Company”). Do you think this kind of cooperation will kill the German’s passion for independent R&D?

An enterprise’s level of motivation and potential for success depend on its internal and external mechanisms, corporate culture, and leadership. Both SAIC and GAC have benefited from joint ventures. One of their greatest strengths is that they have learned how to carry out successful independent innovation. FAW is another beneficiary and is also sparing no effort in developing its own cars, but being subject to various constraints, it has not done such a good job. Geely has no joint venture, but it has bought the international luxury car brand Volvo. Instead of relying on Volvo’s technologies, it is forging ahead with its own innovations (see the articles “How High Can Geely’s New Brand Be Positioned?” and “Behind the Scenes at Geely’s New R&D Center”).

In the final analysis, if a Chinese automaker loses its motivation for independent innovation just because it has formed a joint venture, then even without any joint venture, its prospects of success on the path of independent innovation would be rather bleak.

Are NEV Joint Ventures a Great Scourge?

Q: According to Handelsblatt, the Chinese government will probably delay the electric vehicle quota by a year, but only for German automakers. Any thoughts on this?

A: I haven’t read the Handelsblatt report, but I have heard the Chinese media talk about it. In my opinion, this is at best an erroneous interpretation of China’s policy; at worst it is malicious speculation. The Chinese government has always made protecting Chinese brands and automakers its top priority, and has taken a lot of criticism and pressure from western countries because of this. Even if it does make some adjustment to the policy, equality will still be the bottom line. Now you are telling me the government is going to cross this line and show favor towards German companies? Handelsblatt may be sticking its neck out a little with this claim, but for the Chinese media to repeat it shows their naiveté – either that or they simply want to attract attention. What’s worse, some people have really believed it.  

In fact, there has been considerable debate ever since the draft NEV credit policy (electric vehicle quota) was issued last September, and that’s why it has not yet been implemented. Most people in the auto industry think that accomplishing the 8% target by 2018 is mission impossible for automakers. Most Chinese automakers complained about it, and the German automakers’ reaction was the strongest. According to the China Association of Automobile Manufacturers, the industry average NEV credit percentage is 3%. It would be really very difficult to increase this percentage to 8% in 2018, not least because NEVs are impacted by so many factors – e.g. subsidy reduction and the battery catalogue. In the local market, it’s not as if you can simply sell however many vehicles you produce. The implementation of the policy is almost certain to be postponed. This was already in the news several months ago. From what I understand, during Premier Li’s visit to Germany, the Chinese side chose to raise the subject again just to create a positive atmosphere for the negotiations, rather than to use it as a bargaining chip or to offer a special favor to the German automakers. 

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