Is a level playing field the right target?

As I write this, the IAA Show is on at Munich.  As at most of the recent shows in Europe over the last couple years, one of the biggest talking points is the presence of the Chinese brands in strength.  There are 13 brands exhibiting, some now well known to Europeans, others relative newcomers, but one thing that is clear to everyone is that the threat to the established players from these new entrants is very real.

This is not a situation that has developed overnight, though the way in which the industry and governments are reacting might give you that impression.  The joint venture requirement for any established manufacturer wanting to enter the Chinese domestic market has been established for decades and obviously provided the means for knowledge transfer, something that the Chinese partners took full advantage of, with the growth of own brands also pre-dating the more recent technology-driven assault.  It’s certainly true that ten years ago the quality of those products was uncompetitive and there were still some poor quality copycat products around, but the trajectory was still clear.

Similarly, the technical lead in batteries and electric vehicles has not been established overnight.  The Chinese Government New Energy Vehicle (NEV) policy was laid out in 2012, and accompanied in a demonstration of joined-up government policy that is notably lacking in the west, by building relationships with countries that produced the raw materials and acquiring mining and refining businesses that would become increasingly important if (or when) the NEV policy bore fruit.  It is important to note however that the NEV policy was as much an industrial strategy as an environmental one – cynics might suggest more the former than the latter.  More on this in a moment, but trying to play catch-up with long-established players on ICE cars was almost doomed to failure, whereas pushing into BEVs and hybrids at a time when few future competitors were taking this seriously was a ‘leapfrog strategy’ which as we can see has been highly successful.  As far as the environmental ambitions are concerned, China has not set a date by which all car sales should be emission-free.  There is no EU-style ambition to mandate 100% zero emission sales by 2035, with sales there being driven by support for manufacturers (albeit considered unfair by the EU), the consequent availability of appealing product, some consumer incentives related to registration and usage, and development of infrastructure to support NEVs, at least in the major cities.  The policy is more about carrots than sticks.

If we now look at what has been going in Europe, the new entrant brands continue to make rapid progress overall, albeit with variations by market.  Germany and France remain relatively tough, whereas eastern and southern Europe, Netherlands and the UK are very accepting of the new entrant brands.  MG which was the first Chinese brand to break through in Europe has a success on its hands with the MG3 hybrid launched last year, reported by Dataforce to be in the #3 position in Europe overall within the small hybrid segment, behind the Toyota Yaris and outgoing Renault Clio.  Led by BYD, Chery and MG (and we don’t know in which order) the Chinese are likely to take 10% of the UK market in September which is one of the two peak months in the market.

In an effort to alleviate some of the pressures on the manufacturers, ACEA (their representative body in Europe) is meeting with Ursula von der Leyen in Brussels today seeking some relaxation of the 2035 targets to allow continued sale of hybrid and range extender products.  As the big investment has already been made in the electric transition, this will only make a modest difference to the capex burden, but it will presumably allow manufacturers to reduce the huge cost of incentivising the sale of BEVs to meet the flightpath towards a zero emissions future.  It will also buy them time to establish local sourcing of high voltage battery packs and cell manufacture – an area which is far behind where it needs to be if we are going to consider a BEV as ‘European’ by the proportion of the value which is locally sourced.  This appeal to the EU is driven by the view that the regulations put established manufacturers, primarily the Europeans, at a disadvantage to the Chinese newcomers, and a regulatory relaxation on emissions and safety requirements will help level things up.

Along similar lines, comments from Francois Provost, the newly appointed CEO of Renault, were reported in Automotive News Europe at the  launch of the new Clio in the days prior to the IAA.  He said that “our Chinese competitors are super-efficient on cost and technologies, but our intention is to catch up and have the same competitiveness.”  He felt that this could be done “through a combination of good design, emotional products, better customer experience and high quality.”  This implies that he believes that Renault and their European peers have a competitive advantage in each of these areas.  To some extent design and emotion are subjective judgements, but we have seen ugly designs and bland products from European brands.  Perhaps we are still waiting to see a product from China to emerge that is universally recognised as outstanding in these areas – but most customers don’t care.  With my Omoda Jaecoo retailer hat on, I do not see any quality disadvantage, nor do I hear about it in the market – but there are well-publicised issues with some established brands.  In terms of customer experience, it is not the OEM brand that delivers this, but their retail partners, and many of those retail partners are flocking to sign up with the new brands, and will strive to deliver the same to those customers as they do to in all their franchises.

But perhaps the most telling comment from Provost is that the ambition is to “catch up”, echoing the ACEA ambition to remove a source of disadvantage.  Surely this is the most telling point from an industry that just a decade ago looked down at their Chinese JV partners?  Rather than assuming some level of superiority, they are now seeking to achieve parity – a level playing field.  This is the biggest change that we have seen in the last decade, and it crept up on many in the industry without so much as a glance in the rear view mirror.