Booming Electric vehicles in China’s automotive sector

Posted on January 24, 2011 by


China surpassed Japan with approximately 13.7 million motor vehicles manufactured in 2009. Chinese car manufacturers and brands such as BYD (Build Your Dreams), Chery, Geely, Hafei, Jianghuai (JAC), Chang’an, Great Wall, and Roewe currently producing 44% of the vehicles in the Chinese market (Remaining 56% are via joint venture   arrangements   Volkswagen, General Motors, Hyundai, Nissan, Honda and Toyota). Over 10 million of the vehicles produced in China were passenger cars in the range of sedans, sport utility vehicles, etc and 3.4 million were commercial vehicles such as buses, trucks, and tractors. Rapid growth of the China’s automotive industry can be attributed to the country’s abundant low-cost manufacturing and labour resources, consistent governmental incentives and favourable domestic business investment policies.

China’s interest in Electric Vehicles

Long distance travel is comparatively rare and most people use their cars to make short city trips due to consistent traffic, congestion and a backlog of infrastructure projects. This might be a considerable reason for advancing and incorporating alternative fuel and power technologies for mass market.

Electric Vehicles- Chinese Policies and Automotive Industry Plan

Growing consumer income, demand and the concern about the climate change, Chinese automotive industry leaders and Chinese policy makers have actively pursuing a vision of China’s success within the Electric Vehicle. To achieve this target China’s focus is inclined towards following area such as Target Production Capacity, Subsidies in Public Service Sector, Subsidies to Private Buyers and Development Plan for Energy-Savings.

The Legal Aspects for foreign investment

Foreign investors are continuously looking for China’s lucrative automotive market. Following points explains the legal framework for foreign investors to establish their businesses on China’s ground.

  • The shareholding of a foreign investor in a car manufacturing Business Company is still restricted to no more than 50%. However it can lift down in some cases.
  • China restricted only two joint ventures by the foreign investors that engage in manufacturing the same vehicle type. However this restriction does not apply if the foreign investors invest with their Chinese counterpart. For example GM has invested with Chinese partner in Shanghai Automotive Industry Corp (SAIC) with 49% holdings in the company.
  • Time consuming procedures and approval process by the Chinese central agency stumbles the application process and involves more uncertainty.
  • Unfavourable compliance requirement for the foreign investors such as for joint ventures projects, there is requirement to satisfy the turnover threshold. It may result into merger control notification to the Ministry of commerce and it takes unpredicted time which subsequently increases the cost of transaction.
  • Intellectual property, brand and technology protections are weakly enforced in China

Challenges to China’s electric vehicle’s ambitions

  • High R & D cost involved with the development of electric vehicles makes EV costlier globally as well as in Chinese domestic market. Electric Auto components like Lithium Ion batteries bring very high cost to the users and it is also associated with the leakage.
  • Necessary infrastructure like parking places & recharging points creates problem to the users. Chinese people live in apartments and it is difficult to charge their EV in their parking places in the basement.
  • EVs are not feasible options as compare to the gasoline vehicles which provides greater distance range

China is continuously making improvement in their R & D activities for the Electric vehicle’s development. Technically advanced options to create the more efficient EVs are still a priority. Technology transfer and growing investment are also required from the foreign investors and manufacturer.  Irrespective to the Legal Aspects for foreign investment, foreign investors are happy with the Chinese markets. In 2008, Berkshire Hathaway, bought a 10% stake in Chinese car manufacturer BYD. Recently, Goldman Sachs also announced its interest to buy US$250 million in bonds in Chinese car manufacturing company.  This shows that Chinese biggest consumer market is the top priority for the foreign investors.

Reference

Clifford Chance LLP

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