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China Auto Snapshot: ICE on Fire

It is now five years since China claimed the crown of the world’s largest auto market. Fueled by rising disposable income and surging consumer demand, over 23m vehicles were sold in the domestic market in 2014 - outstripping sales in the US by a whopping 6.5m vehicles. However, as anyone who’s spent time in China knows all too well, this has added to the already chronic air pollution and, combined with concerns over greenhouse gas emissions and energy security, has driven the government to take action. The response has been to both raise emission standards and tighten fuel economy targets. One key takeaway sometimes overlooked in the midst of EV/hybrid buzzwords is that these policies are also opening strong new opportunities for foreign companies to license innovative internal combustion engine (ICE) technologies into China.

While the main focus of government subsidies has been battery-based electric vehicle (EV) technology, the fact remains that EVs have yet to achieve widespread market acceptance. In 2012, China’s Ministry of Science and Technology set EV production targets of 500,000 units by 2015 and 5m units by 2020. However, the reality is that two key challenges in achieving these targets have put the brakes on these ambitious goals. Firstly, global battery manufacturing is still mostly geared towards the production of batteries for consumer electronics such as mobile phones and a shift towards other battery technologies requires a lengthy retooling period. While some companies such as Chinese electric bus manufacturer BYD have responded to this problem by investing more in production lines for hybrid technologies and battery-based EVs, this is still not enough to make up for a supply deficit in the short to medium term. Secondly and more importantly, consumer demand for EVs has been sluggish due to high cost and limited travel range - despite subsidies of over US $9k per electric passenger vehicle, less than 7k of a total 22k manufactured were purchased in 2013 according to the China Association of Automobile Manufacturers (as an aside, hybrid car sales have also been weak as they don’t yet qualify for subsidies).

To achieve emissions cuts necessary to improve air-quality in smog-choked Beijing and Shanghai, China V (equivalent to Euro V) emissions standards have been implemented for all new vehicles in the two cities, with a national roll-out expected in 2018. The government has also mandated that manufacturers improve fuel consumption to 7 liters per 100 km by 2015 and 5 liters per 100 km by 2020. For comparison, average fleet fuel consumption in the US in 2014 is 7.4 liters per 100 km, according to the National Highway Traffic Safety Administration.

In view of the challenges described above around pure EVs, improving and supplementing ICE power-train technology remains a promising and realistic alternative China’s automakers are looking at to meet government emissions and fuel efficiency targets. This has created opportunities at many levels for foreign automotive components firms to supply domestic auto brands such as SAIC, Geely and Chery with enabling technologies. Multinational tier-one suppliers such as Bosch and BorgWarner are introducing improved injection and turbocharger systems for small-sized engines, while ZF has recently opened an R&D center outside Shanghai to develop efficient commercial vehicle transmissions tailored to the Chinese market.

At the same time, smaller venture-backed suppliers of highly innovative technologies are also capitalizing on China’s need for eco-friendly enabling technologies. Examples include:

In March 2014, Ecomotors, a US company backed by Bill Gates, signed a partnership agreement to develop ultra-efficient, lightweight engines in cooperation with Hunan University. The agreement provides Ecomotors with a platform to adapt its products for the Chinese market, while giving local graduate students exposure to new technology.

In 2012, UK-based Brunel University partnered with a heavy-duty diesel engine manufacturer Guangxi Yuchai to develop an “air-hybrid” system for use on city-buses for the China market.

In 2013, Ricardo, a British niche-manufacturer of auto components partnered with Weichai, a leading Chinese commercial-vehicle engine manufacturer to study and design a family of engines targeted at the 1-3 MW heavy-industry applications.

Other developments in variable geometry turbochargers, mechanical kinetic energy recovery systems (M-KERS) and improved transmissions that increase fuel-economy developed by companies such as UK-based Torotrak are actively sought out by large Chinese companies keen to improve their product range and meet the standards imposed by the government.

Deals such as these are becoming more common as domestic tier-one suppliers work to meet ever-stricter emissions standards with existing powertrain technology. Western companies with innovative traditional powertrain technologies should seize this opportunity to gain market share in the world’s largest auto market.

Alex Gover
About the Author

Alex Gover

Alex Gover is our SVP of Business Development. Now based in London, he has worked in and with East Asia for the past 25 years, including at Sony's International Marketing Division at the company's head office in Tokyo. He studied Japanese, Chinese and Economics at Oxford University before going on to take a Diploma in Advanced Japanese at Sophia University in Tokyo.

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