Will Detroit Get Shut Out Of China’s Electric Vehicle Market?

China has been a Godsend to Detroit. Even as Ford Motor, General Motors, and Chrysler have stumbled in recent years, the country has provided a nice boost to sales of American cars equipped with traditional internal combustible engines.

But when it comes to electric vehicles…well, China has its own plans.

The country is spending billions of dollars to develop home-grown battery and motor technology, hybrids, and full plug-in cars, trucks, and buses. And to protect its nascent industry, the Chinese central government has recently issued draft guidelines that limit foreign investment in certain electric vehicle components and require overseas firms to disclose intellectual property secrets to Chinese companies.

“China wants to place some serious restrictions” on foreign auto makers, says Kevin See, an analyst with Lux Research in Boston. “Clearly, the companies inside China are well positioned to benefit. China wants to protect its value chain all the way to the vehicle.”

The proposed restrictions have alarmed American officials. In an April  letter to U.S. Trade Representative Ron Kirk, Michigan Senators Carl Levin and Debbie Stabenow said the guidelines would block U.S. auto makers from accessing a potentially huge market for electric vehicles.

“We are concerned that these draft regulations continue China’s long history of breaking international trade rules,” the letter reads. “These new draft regulations appear to represent another attempt to illegally gain an unfair advantage over the U.S. automobile industry that will cost our country jobs.”

“If China does implement these practices, [Kirk’s office] must use all its available resources—including possible legal action at the World Trade Organization—to end China’s discrimination,” the letter warns.

Since 2009, China has overtaken the United States as the world’s largest auto market. One trip to the country and you’ll see why.

Three years ago, I visited the Changan Ford Mazda car factory in Chongqing, China’s largest municipality, during a fellowship sponsored by the East West Center in Hawaii. At the time, the factory, a joint venture between Changan, a local car maker, and the Ford, employed 7,000 workers, and produced about 260,000 cars a year, including various Volvo models and the Ford S Max.

Factory officials told me they couldn’t hire enough workers to meet demand. As China gets richer, urban middle class professionals are buying homes and cars, the ultimate symbols of the country’s growing prosperity.

“The Chinese people get real rich, they are very eager,” the factory official said. “They want a house to themselves. After they have their own house, the next step is to buy a car.”

To encourage economic development, the Chinese government is also moving hundreds of millions of rural workers to the cities, creating enormous demand for buses and taxis.

By 2030, China is expected to produced 30 million vehicles a year, compared to 13.4 million vehicles two years ago.

The American auto industry has benefited from these trends. Detroit-based General Motors and its joint venture partners today control 12.3 percent of China’s auto market, tops in the country, compared to 3.4 percent in 2000.

Earlier this month, Dearborn, MI-based Ford, said China sales in the first half of 2011 rose 14 percent compared to the same period a year ago.

But looking ahead, China sees itself a major manufacturer of electric vehicles, analysts say, not just to meet domestic demand but also to sell overseas.

Domestically, China is trying to cut carbon dioxide emissions, particularly in cities like Beijing where air pollution is especially bad. But China also wants to compete against foreign automakers in markets outside the country.

The Chinese have one big advantage: the country is home to substantial deposits of rare-earth metals like lithium that are crucial to batteries and electric engines. Neodymium accounts for 30 percent of the material cost of permanent magnet motors, one of the key motor types used in electric propulsion systems.

“This raw material dominance, along with China’s relative labor cost advantage, has resulted in an emerging extended supply chain in motor technology and production,” according to a recent World Bank report. “The result of these advantages in batteries and motors could provide an overall advantage for Chinese companies in electric drive train components and may position Chinese automakers to assume global leadership in electric vehicles.”

In 2009, the Chinese central government launched the Ten Cities, Thousand Vehicles initiative to stimulate large scale adoption of electric vehicles. The program, which initially focused on government fleets like buses, trucks, and taxis, challenged ten cities to roll out 1,000 electric vehicles each.

Since then, the government has expanded the program to eleven more cities. In June 2010, the government started to subsidize consumer purchases of plug in and hybrid vehicles in Shanghai, Changchun, Shenzhen, Hangzhou, and Hefei. Overall, the central and local governments have earmarked $15.4 billion towards investing in new energy vehicles.

“This is a significant increase from earlier statements and sets a new threshold on the world stage,” the World Bank report says.

On the trade front, China’s Development and Reform Commission in April released proposed guidelines that, among other things, limits foreigners to 50 percent ownership of certain electric technologies and requires outside companies to form joint ventures with Chinese firms and to use Chinese manufacturers if they want to sell into the Chinese market. Even more alarming to American officials is China’s requirement that foreign companies must share their IP with domestic firms in order to sell into the country.

China’s commitment (or lack thereof) to safeguarding foreign technology and enforcing patents has strained trade relations with the United States. And for good reason, See of Lux Research says.

“The prospect of Chinese firms reverse engineering outside technology is pretty scary for foreign companies,” See says. “It does expose them. IP protection is a big issue. [The proposed guidelines] put strains on companies to share aspects of their technology and manufacturing if they want access to a giant market.”

However, See cautions, a viable electric vehicle market has yet to emerge for either China or the United States. Automakers still have to justify the higher price of electric cars to wary consumers, not to mention proving the reliability and range of batteries and electric motors.

Nevertheless, the stakes remain high. Concerns over gas prices and global climate change are unlikely to fade anytime soon. Michigan, led by the Big Three, has staked much of its economic future on developing clean energy technologies like lithium batteries and electric motors. As Levin and Stabenow’s letter makes clear, accessing the world’s largest auto market remains crucial to the state’s economic revival.

American makers of electric vehicles must start engaging the Chinese now, See says.

“You want to find the right partners, to get inside [the Chinese market] in a way that makes you feel the most comfortable,” See says. “To act sooner is better than to act later.”

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