China has been a focal point for many global automakers in recent years for a variety of reasons. For Tesla Motors (NASDAQ:TSLA), China has been a promising market due to the government's desire to reduce pollution, opening the door for a surge in electric vehicle (EV) demand. For Ford Motor Company (NYSE:F), China has offered not only a market for its mainstream vehicles, but also a huge array of consumers for Ford's rebounding Lincoln brand, without a host of strong domestic competitors.
Depending on the automaker and its goals in China, last week's news out of Beijing could change EV strategies significantly.
EV way or the highway?
The Chinese government's last EV subsidy program was ineffective (and that's putting it nicely). "Individual companies seeking profit, violated relevant laws to cheat and fraudulently obtain financial subsidies, seriously disrupting the market order, violating the legitimate interests of firms that honor the law in researching, developing and manufacturing new energy vehicles," the government said in a statement, according to Automotive News China.
If at first you don't succeed, try, try again. China's government is preparing to replace the current EV subsidy program with two new programs on a "trial basis" over the next two years and a more strict enforcement of the programs in 2018. The goal is to force automakers to raise the average economy of their vehicle fleets from the equivalent of 34 mpg to 47 mpg by 2020. While the details have yet to be finalized, it's clear China is strongly pushing toward reducing pollution problems by encouraging sales of electrified vehicles.
Which automakers stand to benefit?
It's easy to say that Tesla's opportunity in China just grew immensely with its pure EV approach, and that's fair. However, it's not a guaranteed home run for the company just yet. Tesla needs to keep the price of its Model 3 low enough to gain traction in China, where consumer preference is for cheaper EV models. Also, Tesla will likely have to make a decision as to if and when it will build a plant in China before it's able to fully take advantage of China's growing EV market. That's because in 2018 Beijing plans to introduce a carbon trading scheme, similar to California's, that will force automakers with sales topping 50,000 to produce EVs locally.
Ford also stands to benefit if it can pull through on its pledge to invest $4.5 billion in electrified vehicle solutions by 2020. Ford plans to add 13 new electrified vehicles to its product portfolio by the end of 2020 and estimates that more than 40% of its global nameplates will be electrified by that time. Ford likely won't get credit for its more fuel-efficient EcoBoost engines, but will almost certainly benefit from its growing lineup of plug-in hybrids.
The surprising company that stands to benefit might seem a bit ironic to many investors: Volkswagen Group (NASDAQOTH:VWAGY). The company has been hit with an endless wave of criticism following its massive diesel emissions scandal where "defeat devices" were installed to cheat emissions tests and regulations.
It's partially because of that negative publicity that Volkswagen will look to its EV efforts in China as a way to reestablish a greener image with consumers. Just about a month ago, Volkswagen signed a memorandum of understanding with state-owned Jianghuai Automobile Co., a well-known Chinese EV automaker, to create a joint venture for a lineup of EVs and plug-in hybrids.
That joint venture will be key to Volkswagen, which consistently battles General Motors to be the best-selling foreign automaker in China, meeting the country's increasingly strict emissions regulations -- as well as creating a greener image.
Ultimately, while details are still a bit hazy, it's clear that China's government will continue to push for more EVs to occupy its many streets. And as the Chinese market offers a big opportunity for many automakers, it's going to be the automakers that adapt quickly to new regulations that will be best positioned going forward. That will certainly be easier said than done, and well worth investors' attention as the situation develops.