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China's EV shock treatment signals end for also-rans

China's breakneck push to lead the world in electric-vehicle adoption may cause collateral damage among the legion of domestic carmakers deemed superfluous to the mission.

A flurry of manufacturing and technology alliances plus an investment in Daimler by auto magnate Li Shufu valued at 7.3 billion euros ($9 billion) point to the urgency among Chinese carmakers to bulk up their new-energy vehicle businesses before the rules of the road change.

President Xi Jinping’s administration is implementing NEV production quotas, targeting a seven-fold increase in NEV sales and considering a ban on gas guzzlers as China tries to clear the air in polluted cities and cut its reliance on imported oil. Carmakers that can’t keep pace may not be around for long, and that applies to the biggest state-owned companies as well as smaller, regional manufacturers.

“Ultimately, if you cannot compete in NEVs, you will have difficulty surviving,” said Janet Lewis, a Tokyo-based analyst at Macquarie Group. “SOEs are likely to be under pressure to acquire weaker players.”

A December partnership between state-owned carmakers China FAW Group Corp., Dongfeng Motor Corp. and Chongqing Changan Automobile Co. may be the start of consolidation, according to JSC Automotive Consulting. The trio signed a pact to cooperate on technology development, seeking new business models and outbound investments.

Add that trio to SAIC Motor Corp., China’s largest by sales; Guangzhou Automobile Group Co.; and BAIC Group, and the government has enough carmakers to meet its goals, according to Jochen Siebert, Singapore-based managing director of JSC Automotive Consulting.

That means a separate quartet of domestic rivals -- collectively worth more than $17 billion -- has no independent future and likely will be folded into other government-owned companies, Siebert said. The companies at risk include China’s biggest passenger-car exporter, Chery Automobile Co.; Hong Kong-listed Brilliance China Automotive Holdings; Anhui Jianghuai Automobile Group Corp.; and Jiangling Motors Corp.

“They will be merged with big SOEs at some point,” Siebert said. “From the central government point of view, there is no need for any other SOE automakers.

Representatives for Chery, Brilliance, Anhui Jianghuai and Jiangling didn’t respond to emails seeking comment. FAW, Dongfeng and Changan are still discussing how to cooperate, Dongfeng Chairman Zhu Yanfeng said. Dozens of niche manufacturers and fledgling startups also could be bought or go out of business because they don’t have enough scale or money to produce new models, said Nannan Kou, a senior associate at Bloomberg New Energy Finance in Beijing who focuses on electric vehicles.

Under rules taking effect next year, companies making or importing at least 30,000 traditional vehicles annually must achieve an NEV credit score equaling about 10 percent of the score assigned to their total output or import volume. Different types of NEVs receive a different amount of credits.

Manufacturers missing that quota will have to buy credits from other carmakers or face fines.

“The smaller ones will find it hard to survive,” Kou said. “A lot of these automakers just modify cars or produce unknown models in local markets.”

Last year, about 15 domestic companies sold fewer than 10,000 vehicles each, according to statistics from the state-backed China Association of Automobile Manufacturers. Those ranks include China UFO Auto and Beijing Automobile Works Co.

As emissions standards tighten and engines become more technologically complex, some companies may not be able to afford to keep current.

“Smaller OEMs will not be able to shoulder the burden,” Siebert said, using the acronym for original equipment manufacturers. “By 2025, most of the smaller players will be gone or merged into the larger OEMs.”

Already the biggest electric-car market, China accounted for more than half of worldwide sales last year. Sales of all vehicles grew at a monthly clip of more than 20 percent in 2016 and 2017, according to data from the China Passenger Car Association.

China surpassed the U.S. in 2009 as the world’s largest automotive market and in 2015 as the biggest NEV market. Still, sales by Volkswagen AG, General Motors Co. and other foreign automakers accounted for 56 percent of the passenger-vehicle market in China last year, according to the manufacturers association.

The growth coincides with an accelerating pace for industry mergers and acquisitions. Chinese automakers struck 274 deals valued at $29 billion in the five years through Dec. 31, spending most of it on domestic targets, according to data compiled by Bloomberg.

“NEV development will change the situation and help create some big players and push some of them to huddle with others,” said Cui Dongshu, secretary-general of the passenger car association. “But it will still take quite a while.”

The five-year run of deals excludes billionaire Li’s 9.7 percent stake in Stuttgart, Germany-based Daimler, the parent of Mercedes-Benz. Shufu is chairman of Zhejiang Geely Holding Group Co., which controls Volvo Car AB and Hong Kong-listed Geely Automobile Holdings.

Geely expects to benefit from Daimler’s investments in NEVs and online services. Li this month reiterated a plan to make NEV sales account for 90 percent of his company’s total sales by 2020. NEVs include electric vehicles, plug-in hybrids and fuel-cell vehicles.

The pace of future mergers depends on how fast EVs take over China’s roadways, Kou said, adding that it could happen by 2025. The government set a sales target of 7 million NEVs by then, up from more than 1 million vehicles in 2018.

Even state-owned FAW and Dongfeng may combine because they’ve been slow to develop their EV strategies, and their domestic brands don’t sell well, he said.

“There will be further mergers, especially among the SOEs,” Kou said. “The EV is sweeping through the whole industry. The challenge is how these corporations adapt.”

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