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Will technology disruption end the foreign dominance in China’s automotive industry? (2/2)

Exclusive Interview with Prof. Dudenhöffer, Director of the Center for Automotive Research (CAR)

· automobile

{{{Marco Brizzolara and Maxi Pethö-Schramm}}}

Among the four major automotive trends: autonomous, connected, electric and shared (ACES), electric is (at least currently) the most significant one. Electrification will change the landscape of the automotive industry from a vertical perspective, with key components (especially combustion engine components), being replaced by new ones. But it is also creating change on the horizontal level, with established OEMs implementing their EV strategies, and new automotive companies entering the field.

Thus, when trying to answer the question of how the enormous changes in the automotive industry will impact the way in which China’s automotive industry will evolve, and how Western automotive dominance will be impacted by these changes, a focus on the electric vehicle (EV) industry is indispensable.

This has led us to seek a conversation with Prof. Dudenhoeffer, one of the leading automotive experts in Germany, and an active observer of the Chinese automotive industry. We split the interview into two parts – in the first part we talked about the evolution of the Chinese automotive industry and the potential for collaboration between Germany and China. In this part, we ask Prof. Dudenhöffer about China's role in the emerging electric vehicles industry.

About Prof. Dudenhöffer

Prof. Dudenhöffer, is not only an leading academic but also well-regarded among practitioners. He is an expert on EVs, on the Chinese automotive market, and organizes some of the major automotive conferences between China and Germany, attended by the CEOs of Germany’s and China’s largest OEMs and suppliers.

Interview

One of your focus areas is the EV industry, an industry that the Western world has often admired China's ability to grow. At the same time, you repeatedly criticized German automotive companies for changing too slowly. Standing at 1.1 million units, or 51 percent of global EV sales in 2018, China’s market is about three times the size of each of the European and the US markets. What are the key factors contributing to this development, and do you think China can keep its global dominance in EV sales?

For EV, you need the right regulations, and China put these in place early on, while taking the proper measures to build up the industry. In Europe, the push for EV started a little bit later because of environmental considerations. In the US, the future is difficult to predict, as many different forces are coming into play. We already see that Europe, China, and Japan, representing roughly 60% of the global car market, are pushing for EVs, so I am confident that EVs will soon see the scale necessary for the technology to become affordable and widespread. One of the significant challenges, however, is surrounding where the power for EVs is generated. Right now, in China and Germany, a lot of electricity comes from coal, and to replace coal will not only be possible by renewable energies, but we will need to rely more on new generations of nuclear power as well.

China aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060

Given, the concerns over nuclear power, especially in Germany, do you think a push towards nuclear power is likely?

In 2011, Germany made the decision to phase out nuclear power until 2022, which I would consider an irrational decision. On the other hand, in Switzerland, the lifetime of power plans has been extended. In France there is a high dominance of nuclear power, and Russia will also likely see a push towards nuclear energy. I expect a significant push towards nuclear power in Eastern European countries. If these countries want to remain a popular location for car battery manufacturing, only nuclear power plants will provide them an affordable, and CO2 neutral generation of power.

Chinese companies like CATL, Ganfeng Lithium and Tianqi Lithium have established a global footprint in the EV battery supply chain. As of April 2019, China produced 60% of the global lithium battery supply. What does this dominance mean for the global automotive landscape?

Some people think that the industry leading position of some of the Chinese battery manufacturers is a big challenge, but I don’t see it that way. If you look at the production process of Lithium-ion batteries, the process is highly automated, and there are more than 10 to 15 large battery/cell manufacturers around the world, so we predict a large degree of competition between companies. To just claim we are dependent on China for EV batteries is an incorrect statement. We see strong companies from other countries like Japan and Korea as well, and even companies in China are strongly competing against each other.

Looking at Germany, I see the discussion about battery manufacturing as part of a larger issue, in which politicians, foremost our Economic Minister, Mr. Altmaier have the idea that Germany should be the champion in every technology. The result is that we are not focusing enough on strengthening our core, and might lose out on the great opportunities we already have.

From my perspective, in Germany, we have a chance to create sustainable competitive advantages in the EV battery industry if we focus on material science instead of battery manufacturing. Looking at Lithium-ion Batteries, the major components are Anode, Cathode and Electrolytes, and these materials are contributing 70 to 80% of value compared to the manufacturing process which only contributes 20 to 30%. German chemical companies such as BASF are leading in that area and have good reasons to invest in materials for batteries, so I think in the end, materials rather than the manufacturing process is really where German companies should focus, as we already see a large degree of competition in the manufacturing process.

Which companies will benefit the most from the EV boom in China and what are their respective advantages as competitors in the Chinese market? Will it be foreign car manufacturers such as Volkswagen, Toyota and Tesla; large domestic car manufacturers including SAIC, Dongfeng, FAW, Chang`an, BAIC and Geely; or rising e-vehicle companies such as BYD, Nio, and Li Xiang?

There will be consolidation in the Chinese industry. I think the most important player is Tesla, because they are the global technology leader and pioneer. I also see a great future for private-owned Chinese car companies such as Geely (see article), Great Wall Motors, and to some extent BYD. While state-owned companies, such as FAW, one of the joint venture partners of Volkswagen, are experts in administration, and good partners for foreign OEMs, I don’t think they will represent serious competition in the EV industry.

Looking at private car companies, Byton, a Chinese car company established in 2017 and formerly led by German automotive executives, has been seen as a promising company in the space, but now seems to be close to insolvency. What is your view on the company, and what do you think went wrong?

I think not all private-driven companies will be sustainable in the future. They need both a clear business plan and innovation. What we see with Byton, Faraday Future (US company), and others, is that they have majorly focused on storytelling, which is not sufficient to build a strong company. Personally, I am much more confident of Geely, Great Wall and BYD, which have a well thought through go-to-market strategy.

Conclusion

 

Observing the dominance of foreign OEMs in China's automotive industry and significant industry changes driven by technological change, we talked to Prof. Dudenhöffer to find out what these changes will mean for the Chinese and global automotive industry. In the first part of the series, we spoke of the overall automotive industry. In this part, we focused on electrification, the primary trend shaping the mid- to the medium-term automotive sector.

Based on our conversation, we can make five predictions for the future:

1) China's companies will become ever more relevant in driving critical technologies for the automotive industry. Next to the US, Japan, and Korea, Chinese tech companies will shape future technologies such as 5G, autonomous driving, and lithium batteries.

2) China's automotive market will manifest itself as the by far largest automotive market in the world. Given its low car density compared to other regions such as Europe and the US, China might one day become a market with 50 million vehicles sold per year.

3) Asian countries, especially China, will continue to be a crucial part of global automotive supply chains. Compared to other regions, China exhibits a high degree of political stability and openness to trade. Besides, China's Belt and Road Initiative will further accelerate global supply chains involving China.

4) China will continue to develop its EV industry effectively. While there are ups and downs, China's electric vehicle market is the largest globally, and some Chinese companies are likely to benefit from the boom significantly. Simultaneously, industrial policies will positively impact the further growth of the industry.

5) Battery manufacturing will be dominated by China, yet suppliers will likely be elsewhere. Whereas manufacturing will likely be driven by large Chinese companies such as CATL and BYD, companies in the US, Korea, and Japan will stay relevant. At the same time, there are enormous opportunities for companies to take part in the value chain.

Summing up, technological trends will surely change the way Chinese and foreign companies will work together in the future. Yet one thing will always hold: Companies avoiding international collaboration and competition, will be the ones losing. No single company, nor country, dominates the automotive industry supply chains today or in the future.

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