Chinese rules, German opportunities

How Germany and China are shaping the future of mobility

One in three cars made by German manufacturing groups VW, BMW and Daimler is sold in China. And one in five of the 24 million cars sold in China is German. Who is benefiting most from this remarkable symbiosis? How will it affect the future of mobility? And what will be the impact on the fleet industry? Global Fleet examines.

China is not just the world’s biggest car market. Uniquely among major nations, its economy is entirely state-led. Running a for-profit business within the strict rules set by the Communist Party is challenging – but its tough targets also provide a certainty that German carmakers are finding useful.

In the West, it’s the market that decides. The pace of vehicle electrification, for instance, ultimately depends on whether consumers will want to buy EVs. China is a different story. There, the government decides how many EVs will be sold, and when.

From the perspective of long-term strategic planning by OEMs, such an approach has its advantages. In theory, China’s planned economy provides more security for the massive investments required to develop electric cars than the easily changeable preferences of the consumer. The practice, however, can be quite different. The Chinese government is prone to change its mind every so often – an approach that is so widespread that it has generated its own acronym: PDC (Plan-Delay-Cancel).

Made in China

The Chinese government however does have a wide-ranging road map for its entire economy. Launched in 2015, ‘Made in China 2025’ is a ten-year plan to shift the economic emphasis from cheap manufacturing to high-tech production. It is, incidentally, inspired by Germany’s ‘Industrie 4.0’ strategy, which promoted the computerisation of manufacturing.

There’s also a detailed plan for transforming the automotive industry. The plan has seven ‘areas of progress’, each with timelines running to 2030. They include efforts directed at

• Fuel efficiency: the average vehicle should consume no more than 3.2 litres per 100 km by 2030.
• EVs and PHEVs: they should be in the sales Top 10 by 2020 and represent half of all sales by 2030.
• Hydrogen-powered vehicles: they should cost 40% less and have sales of 1 million units by 2030.
• Autonomy: 80% of all new cars must be Level-3 autonomous by 2025, to increase to 100% by 2030, when 10% of all new cars must be Level-5 (i.e. fully) autonomous.
• EV range: Pure EVs must have a range of 500 km by 2030. Vehicle weight: using advanced carbon-fibre technology, average vehicle weight must decrease by 40% by 2030.

Forced advances

China has established these targets because it has the ambition to massively increase the number of New Energy Vehicles (NEVs – a term that includes both battery-electric vehicles and plug-in hybrid electric vehicles) on its roads.

Beijing wants to boost not just electrification, but also connectivity. The aim is to help reduce pollution, congestion and dependence on foreign oil. In the longer run, China expects its forced advances will give it a position of global leadership in electric and connected mobility.

Foreign OEMs appreciate the clarity of the roadmap and are keen to oblige. They have signed up to China’s roadmap, scheduling the launch of numerous NEV models. But China’s system of government-mandated rules and quotas is not just a one-way street. The policy makers in Beijing are not entirely immune to the demands of foreign OEMs, especially the German ones.

Direct intervention

From 2019 – a year later than originally planned – OEMs selling more than 30,000 vehicles per year in China have to have 10% NEVs (i.e. hybrids or pure-electrics) in their sales volume. The system will work via quotas, with higher values for EVs with a long range, and lower ones for hybrids.

Because of the quota system, VW, with annual sales of around 3 million, would have to sell only around 75,000 EVs in 2019. But the quota will go up year after year. The delay by a year reputedly is the result of a direct intervention by German chancellor Angela Merkel with the Chinese authorities. The German car industry has voiced its satisfaction with the delay.

As a result of its efforts, especially in electric mobility, China is transforming its automotive industry more rapidly than any other country and is becoming a crucible for innovation. This is due in part to China’s increasing willingness to be flexible on certain matters. China knows it needs foreign know-how to achieve its ambitious targets.

Red lines

For example, China has said it will drop the requirement for foreign OEMs to look for local partners when setting up production in China, and not own more than 50% of the resulting joint venture.

Many foreign companies grudgingly tolerated that requirement, because it gives Chinese companies the opportunity to gain insight into their advanced technology – and potentially copy it themselves (which Westerners tend to think of as ‘stealing technology’ – whereas the Chinese think of it as ‘sharing know-how’).

The rule change will apply already in 2018 for manufacturers of pure and hybrid electric vehicles, will be widened to LCV manufacturers in 2020 and to car manufacturers in 2022.

The new rule is unlikely to change much for German OEMs, who are already established in China, legally bound to joint ventures for many years into the future. VW, for example, has joint ventures with SAIC from Shanghai (until 2035), with FAW from northern China (until 2041) and with JAC from central China for building EVs (until 2042).

In theory, BMW could now go it alone with its planned Chinese factory for electric mini cars. But it has said it will pursue the agreement initiated with Great Wall.

Even when not strictly necessary, German companies (like chip maker Infineon, which partnered up with SAIC for its power module for EVs, even though the tech was all German), have come to see the benefits of partnering up: Chinese partners act as door openers, have easy access to government credit and facilitate the acquisition of building sites, among other things.

The main beneficiary may be Tesla, which is looking soon to open its first plant outside the U.S., in the Shanghai area. The plant, which is slated to open in 2020, will eventually produce 500,000 vehicles a year.

New products

For now, German OEMs are managing to navigate the strict rules and huge opportunities of the Chinese market to their advantage, not just in matters of sales, but also when it comes to experimenting with new products and formulas.

Daimler, for example, last May merged its two car-sharing services in China: car2go (free-floating) and car2share (station-based). Both were created for different markets. Car2go (called ‘Jixing’ in China), which started in Ulm in 2008, was launched in China in Chongqing in 2016 with 600 vehicles – it is now the largest location in the world after just one year. It offers mobility to the general public in a limited area. Car2share (launched at Tencent in Shenzen in January 2014; operating in Beijing, Shanghai, Hangzhou and Chengdu in 2018) focuses on business parks, shopping malls, universities, etc.

Obtaining a license plate in Tier-1 cities (Beijing, Tianjin, Shanghai, Guangzhou and Chongqing) is increasingly difficult, so mobility needs are covered by other solutions that a personal car. In practise, Chinese employees manage their own mobility, and charge the cost to the company. The merger offers a true workable alternative for corporates to start organising their employee’s mobility needs – something they’ve been reluctant to do.

Huge scale

Another example: remarketing expert RMS has delivered a pilot allowing BMW to manage the remarketing of its ‘certified pre-owned vehicles’ in China. The programme will be rolled out to 400 dealers across the country. The programme will move from online auction only to include, in a later stage, multi-channel sales, auto-pricing and enhanced vehicle settlement capabilities. The initiative is all the more interesting by the fact that remarketing, as a full-fledged, separate industry, does not yet exist in China.

It’s not just German manufacturers that are benefiting from the huge scale and unique structure of the Chinese market. German suppliers as well are in on the game. Webasto, a specialist in heating, cooling, charging and roofing systems, is generating around a third of its €3.5-billion annual revenue in China. This is thanks in part to the Chinese preference for sliding (panoramic) roofs: while around every third vehicle in the world has one, that share is at around 40% in China.

These are just a handful of examples of how German companies are benefiting from the opportunities offered by China – and are changed by those opportunities. Many more opportunities (and changes) will follow.