New electric vehicle partnership blooming in China

Beijing Siemens Automotive E-Drive System Co., Ltd., the new joint venture has Beijing Automotive Group (BAIC) 40% of the stakes and remaining 60% is jointly owned by Siemens AG and Siemens International Trading; this announcement has led to the suppliers to follow the automakers' trend of partnering with Chinese automakers. The joint venture mainly focuses on manufacturing motors and inverters for hybrid and electric vehicles (EVs). Small-scale production will commence in 2014; however, high-volume production will start in 2015. Since the partnership mainly focuses on production of motors and inverters, it will not only support government plans of environmental concerns but also benefit from the low-cost manufacturing as the Chinese market is considered to be the biggest market for the automotive industry.

China, the Biggest Market Opportunity

Since China is considered to be the largest automotive market, automakers and suppliers have designed numerous strategies to capitalize the opportunity before its competitors. Electrification of powertrains has become a standard practice for automakers across the world and introduction of micro, mild, and plug-in hybrid vehicles has confirmed their participation in the market. The market preferences toward different types of EVs prevail in different geographies depending on the usage. According to the Frost & Sullivan analysis, approximately 3% to 5% vehicle sold globally will be electric vehicles by 2020 that includes plug-in hybrids. Although the current market scenario indicates North America, followed by Europe as the leaders, as the market will evolve, China is likely to emerge as one of the leaders mainly due to strong initiatives that the government will be forced to implement to control the transportation problems in the country.

The new energy vehicles policy in China has been mainly adopted due to 3 main reasons, which are the following:

• The growth of the automotive industry
• Aim to reduce pollution and CO2 emissions
• Energy security related to oil imports

The local automakers are closely looking at addressing the challenges with the help of government support, and there are a number of automakers - both domestic and foreign - involved in the new energy policy initiative.

Though the Chinese New Energy Program is underway, with the current pace, it would be challenging to meet the goal of 500,000 hybrid and EVs by 2015. Partnerships such as the Siemens and BAICs would be necessary to enhance confidence with in the industry toward achieving the long-term aspirations.

Tesla has started delivering its Model S in China along with an aim to invest billions of dollars in establishing EV infrastructure; however, it will require a local partner if it has to manufacture it in China. Daimler is offering Denza electric, which has been developed in cooperation with BYD and is entitled for subsidies from both central and local governments. The subsidies include cash incentives up to $9,800 that will continue until 2015. The government is also likely to waive off the purchase tax, which will be another boost for the sales of EVs. Currently, there are more than 70,000 EVs on road in China, and the government has set a goal to have more than 5 million hybrid and EVs on road by 2020, which will pressurize the automakers if implemented with seriousness.

BEV: Battery electric vehicle, eREV: Extended-range electric vehicle, NEV/ QC: Neighborhood electric vehicle/quadricyle, PHEV: Plug-in hybrid electric vehicle, FCEV: Fuel cell electric vehicle

Could it Be a Smart Move for Siemens?

The announcement of the partnership between Siemens and BAIC can be a successful step for Siemens to merge in to the world largest automotive market by producing components such and motors and inverters for EVs. Although local automakers have established partnerships, the market for EVs is nascent and in evolving phase that will give Siemens a head start with the early mover advantage. The main reason for suppliers or automakers to shift or create a base in China is to adopt low-cost manufacturing, which automakers such as Daimler, Volkswagen, and BMW have already adopted. Since the Chinese Government mandates foreign automakers to partner with local manufacturers, the automotive giants have not only established partnerships but also opted for a partial ownership. Daimler was the first foreign car manufacturer to buy stake in a Chinese-owned automaker, BAIC. As the EV market evolves, partnership across various verticals becomes a popular trend in the industry. The recent announcement of the partnership between Siemens and BAIC is an indication toward the evolution of the market in 5 to 7 years from the start of production of motors and inverters. The joint venture is formed mainly to produce efficient motors and inverters for hybrid and EVs with an aim to lead the market for efficient drive technologies. Although BAIC has partnered with automakers such as Daimler and Hyundai, it is the first partnership for Siemens in China. BAIC will use the electric powertrain in its S, C, and L models. The partnership will not only supply electric powertrain to BAIC but also aim at establishing partnerships with other automakers. Under the revised policy in China, hybrid vehicles would be mass produced in 2015 through to 2020. Therefore, observing the current economic situation, along with the opportunities, Siemens has managed to secure a partnership with one of leading automakers in China. These types of partnerships will help the market participants in China to develop their capabilities and create a supply base for the automakers by offering EV components in a competitive price. In China, there are only a handful of suppliers that can meet the demands of EV manufacturers; therefore, such partnerships will transform the industry by supplying components in terms of improved reliability, cost, and quality.

Conclusion

The EV market is facing challenges, which are mainly lack of technology and infrastructure and high production cost. Therefore, partnerships with foreign automakers and component suppliers will help domestic participants to understand the technology and implement the same. China has become an attractive investment option for foreign automakers; however, the Chinese domestic market is yet to take off. Are such partnerships an indication of the greener times ahead for China and the global market?