China will release favorable policy for foreign new energy vehicles

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Once the policy is released, Tesla will be on an equal footing with the start-up car companies. 

On April 22, 2014, Tesla CEO Elon Musk personally delivered the first Model S cars in China to Yu Yongfu, the chairman of Alibaba Entertainment; Li Xiang, the CEO of CHJ Automotive(车和家); Chinese famous host Wang Han and five other people. Three and a half years later, news that favorable foreign invested new energy vehicle (NEV) business finally is heard in China. And building factories in China which Tesla has always been considering may be likely to come true this time.

Favorable policies come out

According to Cailianpress.com, China is expected to lift restrictions on foreign shareholding NEV business as early as 2018; as well as on the shareholding proportion of NEVs in FTA.

This information tells everything. And comments have already explained it. Two of the four comments noted Tesla’s building factory in China and its latest “rumored” venture partners Shanghai Lingang Group. As for whether the news is favorable or not for domestic NEVs (enterprise) needs a dialectical standpoint. That Tesla builds factory in China could undoubtedly stimulate competition and drive the prosperity of the electric car industry chain; But at the same time, are the start-up car company ready to compete with Tesla?

Back to regulatory issues. Although Cailianpress.com did not mention the source of information, based on what we have learned through different channels, we find the news of loosening regulation is not groundless.

On June 28, NDRC (National Development and Reform Commission) and MOFCOM (the Ministry of Commerce) jointly issued the Guiding Catalogue of Foreign Invested Industries (2017 revision). On manufacturing whole cars and special cars, its 7th article only insists the shares held by Chinese part shouldn’t be less than 50% but has no clear requirements on whether JV’s main business is automotive manufacturing.

The direction shifted.

On August 16, the State Council issued the Notice on Several Measures to Promote Foreign Investment. The first article about “further lift restrictions on foreign investment” has such expressions:

Further expand market access to the outside. Continue to promote the opening up of development of special vehicles and NEVs, and make clear the schedule and roadmap for opening up.

Then came the response of the two ministries to this policy trend.

On September 15, Meng Wei, the deputy director of the policy research office and spokesman of NDRC, in a press conference pointed out that in order to further optimize the environment of foreign investment, in second half of this year, China will further ease foreign investment access in areas such as finance and NEVs.

(on the afternoon of September 19, Caixinpress.com released a message that China may possibly lift its restrictions on foreign ownership of NEVs as early as 2018.)

At a routine press conference on September 21, Gao Feng, the spokesman of MOFCOM, responded the question that foreign invested NEV enterprises set up wholly-owned foreign enterprise in FTA as follows: the NEVs industry in China has been sticking to the principle of open development. The Guiding Catalogue of Foreign Invested Industries released in June this year has explicitly lifted restrictions on the number of joint ventures manufacturing electric vehicle whole products in China and on the proportion of stocks held by foreign investment in automobile power battery. Next, in line with the No. 39 notice released by the State Council, the Notice on Several Measures to Promote Foreign Investment, MOFCOM will coordinate and promote the relevant departments to research policies and measures as soon as possible to reduce restrictions of foreign investment in the field of the NEVs, constantly advancing its opening up.

Is Tesla’s Gigafactory 1 in Nevada producing something else besides power cells? With the implementation of Model 3 production plan, Tesla began producing motors and gearboxes there, and pushed a group of suppliers to set up factories there to form an electric car industry cluster. Considering the policy lifting restrictions on both electric vehicle production and power battery restrictions, does this mean that Chinese government begins to encourage the development of the Tesla industry cluster in China?

In the light of the Chinese government’s attitude towards NEV regulation, this article thinks we cannot praise it more. The Chinese government has the most determined and comprehensive attitude towards the development of NEVs than its counterparts. And it is more than “double point policy” released by the Ministry of Industry and Information Technology, which nearly shocked all world’s biggest carmakers. In China EV100 Forum in the beginning of 2017, BYD chairman Wang Chuanfu spoke out: “compared with other countries, China started NEV enterprise rather late but we have obtained rapid development, which should give the credit to our policy and system. What is driving China’s NEVs is China’s policy systems which is most comprehensive and systematic in the world.”

Driven by policies, sales of NEV in China rose by 53% year on year to 50.7 million in 2016. And China surpassed the U.S. and became the world’s largest market for NEVs.

Tesla has gone from frustration to explosion in China

Tesla has always had high hopes for the Chinese market. In 2014, Musk said in an interview with Sina Finance after the first eight cars were delivered.

China is a very important market and arguably the most important market in the world. Tesla plans to make massive investments in the Chinese market, establishing a network of supercharger stations, customer service centers and electric car stores. It is too early to build a factory in China but it is in Tesla’s long-term plan.

However, things go contrary to the wishes. Instead, in the next two years, sales of Tesla in China remained low. In 2015, Tesla didn’t reach its global annual sales. When inquired by investors, Musk ascribed it to that “the sales in Chinese market is unexpectedly bad”. It is impossible for Musk, who is highly effective and a man of action, to tolerate the undesirable performance in Chinese market, which “hinders global sales”. Consequently, the managing staff of Tesla in China changed repeatedly – until sales picked up.

The situation turned for better in 2016 when Tesla’s global revenue reached 7 billion dollars. Chinese market was more than 1 billion dollars, accounting for nearly 15% of all and up by 234% year on year. How Tesla performed in Chinese market in the past time of 2017?

Data from JL Warren Capital, a market research firm, shows that Tesla exported 4,799 Model S/X to China in Q1 2017, up by 350% year on year. Tesla’s China sales accounted for 18.9 % of the global total, according to the delivery volume released in Tesla Q1 Finance Report (25,418 vehicles).

Sales growth in Q2 was even sharper.

This is BEV market share in China published by Bloomberg. Tesla’s market share in China in 2017 ranked the forth after BAIC Motor Corp Ltd, BYD, Jiangling Motors (and it is the only a foreign company in top ten), accounting for 8.6%. What level is this?

On July 11, China Automotive Industry Association released data on the production and sales EV in H1, 2017. From January and June of 2017, the total production and sales of NEVs in China were 212,000 and 195,000 respectively. A combination of two data points to Tesla’s H1 sales, 195,000 multiplying 8.6% equaling 16,770. Considering Tesla Q2 Financial Report, we could learn that Tesla sold 4,7100 vehicles in H1, 2017. That is to say, said, in H1 2017, the proportion of Tesla’s sales in China has risen to 35.6% of its global market, making China the second-largest market after the United States.

But from Musk’s perspective, the result is far from satisfying but is only an initial stage. When talking about the Chinese market with Ren Yuxiang, he said, “for any car company, China should be its biggest market. Growth in China should exceed global growth. The Chinese market will definitely surpass the U.S. market in the future.”

Why do I think the Model 3 is bad news for China’s new car companies? First of all, undoubtedly, Model 3 is a powerful product. In the absence of test drive or even detailed configuration information, the orders for Model 3 had exceeded half a million before the Model 3 was delivered at the end of July. In the words of Li Xiang, CEO of CHJ Automotive, this is a typical faddish product like iPhone. However, Musk revealed that few orders were from China.

Musk attributed it to “not having a Model 3 launch in China”. But we are more likely to believe that the underlying cause is compared with potential Model S/X customers, and the potential customers the Model 3 are more price-sensitive. The importance of Tesla in China is further highlighted here. In line with Tesla’s consistent pricing logic, the price of cars manufactured in China is bound to cut VAT and tariffs and equals that of the U.S. That is, without government subsidies, the price of the entry-level Model 3 produced in China should be priced at about 230,000 yuan (35,000 dollars). The long-endurance version will be priced at just 276,000 yuan (42,000 dollars).

Thus, for Tesla, the Model 3 is most likely to be its first car mass-produced in China. If Tesla factories are to be built in China in early 2018, as early as H2 2020, cars mass produced in China will be available. There isn’t a long time for domestic new car companies. It also explains why China’s start-up car company are all working hard and trying to push the product to market as soon as possible. NIO, which has the fastest move, will have its ES8 on the market by the end of this year. This is because if they move slowly, they might even die before start.

 

This article originally appeared in 36kr and was translated by Pandaily.

Click here to read the original Chinese article.

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