China May Rethink Electric-Car Push; Buffett’s BYD, which prides itself as being the champion of electric cars in China, acknowledges change is coming

China May Rethink Electric-Car Push

By YOREE KOH And COLUM MURPHY

SHANGHAI—Some of the world’s largest car makers including Germany’sVolkswagen AG VOW3.XE +3.38% and Toyota Motor Corp. 7203.TO -0.72% are using this month’s Shanghai auto show to send a message to Chinese policy makers: Wake up from your electric dreams.

The big auto makers are introducing gasoline-electric vehicles and promising to build components for the vehicles here in a bid to win greater government backing for the technology amid weak demand for purely electric-powered cars.

“There is a discrepancy between the general targets and the general goals of the government and the present situation,” said Jochem Heizmann, head of Volkswagen in China. “For the next 10 years, generally plug in hybrids have a much better chance to become a relevant volume in comparison to just fully electric cars,” he added.

Toyota unveiled its new hybrid Yundon-Showanchin II, which was developed specifically for China. Toyota Chairman Takeshi Uchiyamada, known as the father of the company’s most popular hybrid Prius, said on Saturday that as China’s auto market grows “hybrid vehicles without a doubt will become a necessity.” Toyota plans to start locally producing key hybrid components by 2015.Honda Motor Co. 7267.TO -1.02% also is spicing its China lineup with more hybrid vehicles. The three hybrids it introduced in China last year, the CR-Z, Insight and Fit Hybrid, were prominently parked at the front of Honda’s booth this week. Honda is making plans to produce hybrid components here in 2014.

The potential emphasis on hybrid-car sales comes as the Chinese government’s campaign for “new-energy” vehicles that has focused on pure electrics has faltered with consumers as a result of an underdeveloped recharging infrastructure and the relatively higher sticker price for electric cars than their gasoline-powered counterparts. China’s leadership increasingly also has acknowledged the country’s considerable pollution, and its dependence on oil imports has grown along with its car purchases.

“After deduction of various incentives the customer needs to pay around 140,000 yuan,” said Zhu Jun executive director of SAIC Motor Corp.’s 600104.SH -3.94%technical center. “This is already much more expensive than a conventional car of that size.”

Mr. Zhu said consumers intending to drive long distances between rechargings also need to be aware of the different ranges for electric vehicles.

“People compare conventional cars with electric cars. Actually they should be educated to be practical,” Mr. Zhu said. “If you are asking for a 500 kilometer range then you have to have a bigger battery and that is very costly.”

Even with the help of generous government subsidies Chinese consumers bought only 11,375 electric cars in 2012, a paltry sum in the world’s biggest car market where vehicles sales reached 19.3 million the same year, according to the China Association of Automobile Manufacturers.

That’s a long way from Beijing’s goal to have 500,000 hybrid and electric cars on Chinese roads by 2015 and 5 million by 2020. Analysts say the odds of meeting those targets are long. Sales of hybrid vehicles have been weak, too. Hybrid sales accounted for 2% of Toyota’s 840,000 China sales last year, and Honda only sold 542.

The weak demand for electric vehicles is also felt in the U.S. There, scant demand for electric cars has forced several startups and publicly traded companies to shut down. Last year Nissan Motor Co 7201.TO -1.71% . sold 9,819 Leafs in the U.S., just 1.5% more than in 2011. and less than half of the original 20,000 target.

Yale Zhang, managing director of Automotive Foresight an automotive consulting firm in China, referred to a Chinese saying to describe the country’s flagging electric-vehicle sales: “The thunder roars loudly, but little rain falls.” The lack of charging infrastructure and cost are holding back sales, he said. Mr. Zhang estimates there are about 30,000 electric vehicles on the road in China.

Auto makers like Toyota and VW hope hybrid sales will get a lift with the next round of government policies that could offer more favorable purchase subsides on hybrids. In the past, such subsidies have been heavily tilted toward electric vehicles.

Ivo Naumann a Shanghai-based consultant with consultants AlixPartners believes a rethink is under way at the top and a new direction may be announced soon.

“There will be redirection of [government] subsidies toward hybrids,” he said. “Once that happens the hybrid market will see growth.”

There are signs the shift is coming. In March, the state-run China Securities Journal cited Miao Wei, head of the Ministry of Industry and Information Technology as saying China would make changes to the existing subsidy program to cope with the changing environment. For example, subsidies would vary based on the degree of a vehicle’s fuel efficiency—the more fuel-efficient a car, the greater the subsidy.

BYD Co., 002594.SZ -2.72% a Shenzhen-based car maker that prides itself as being the champion of electric cars in China, acknowledges change is coming.

“We don’t see the government backing off on electrifying public transportation,” said Stella Li, senior vice president of BYD. “But we do feel they’re taking strides to adopt more hybrids into their incentive programs [for private buyers.]”

Some car makers have not given up on pure electric vehicles. Denza, an electric car jointly developed by Daimler AG DAI.XE +3.45% and BYD, will begin production this year and go on sale in 2014, an executive at the German auto maker said on Saturday.

“This is at the top of the [Chinese] government agenda,” said Hubertus Troska, the member of the management board of Germany’s Daimler responsible for China. “They want to push EV.”

But car makers expect consumers will go their own way for now. Honda CEOTakanobu Ito on Saturday said, “We think there are still more Chinese consumers who want to simply buy a car that fits their needs rather than buy a hybrid,” he said. “I mean a good-quality car with an affordable price that doesn’t break down. At present, this takes higher priority.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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