Autos

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

(Corrected )

China's plan to let foreign carmakers like Ford Motor Co. and Volkswagen AG set up wholly owned electric-car businesses, exempting them from auto industry rules that require joint ventures with local partners, is already being hailed as a landmark opening of market access.

That may be the case. But there's another force under the hood: economics. 

The policy change is being discussed and could be put in place as early as next year, Bloomberg News reported, citing company officials briefed on the matter. China earlier this month became the largest country to pledge an end to the production and sale of fossil-fuel-powered cars, without setting a deadline.

China Drive
New energy cars are expected to make up all new auto sales growth in China in the next 8 years
Source: China Automotive Information Net, Bloomberg New Energy Finance
Note: China's vehicle sales according to the 2025 government plan.

The three main motivations are simple: Beijing views the need to decrease dependence on foreign oil as a matter of national security; realizes the urgency of cleaning up pollution; and thinks electrification can help establish the country as a global technology leader, rather than just a follower. 

Its ambitious targets call for annual sales of new-energy vehicles to reach 7 million by 2025, or 20 percent of total car production. Government mandates may require manufacturers to obtain credits equivalent to 8 percent of the cars they currently sell in China, either by producing new-energy vehicles or buying credits from competitors to make up the difference. That proportion would rise to 25 percent by 2025.

Slow Flow
Even though China leads the world in sales of electric vehicles, it's projected to sell fewer than 400,000 cars this year
Source: Bloomberg New Energy Finance, automakers, vehicle registration agencies
Note: 2017 is an estimate.

The only problem is, China's current electric car sales come nowhere close to those numbers: 151,000 were sold in the first half of the year, albeit on pace to beat last year's 283,000 and higher than other countries tracked by Bloomberg New Energy Finance.

And China EV sales of foreign carmakers such as Ford Motor Co., BMW AG and Daimler AG, which all take in healthy car sales in the country, are still pretty slim. 

Home Turf
Tesla is the only foreign automaker with a significant percentage of the China electric car market
Source: Bloomberg New Energy Finance

To speed up development, it makes sense to drop the onerous partnership rules on EVs and give incentives to foreign carmakers to establish electric-car operations. Not only will that bring more cars to market more quickly, it will avoid a repeat of the situation whereby some lazy state-owned carmakers grew accustomed to the money brought in by foreign partnerships and did little to advance auto technology.

It's also likely that the so-called knowledge transfer Chinese carmakers were supposed to get from past partnerships will happen even without formal ventures.

If foreign carmakers like Tesla Inc., which is considering a plant in Shanghai, are churning out hundreds of thousands of cars a year, they'll want to keep as much as possible of the supply chain in China -- using local parts-makers that, in turn, will be able to service domestic automakers like BYD Co., Geely Automobile Holdings Ltd., and BAIC Motor Corp.

Overseas carmakers won't necessarily go it alone. They may find a middle way, opting for minority partners in the auto or even tech industries rather than forgoing tie-ups altogether. Local partners can help navigate Chinese political waters, as well as wade through the numerous provincial and local regulations. 

The strategy would enable automakers to avoid the pitfalls encountered by foreign companies that eschewed partners in other industries, such as retailing and insurance. At the same time, they can maintain the majority ownership needed to accelerate product development in the world's largest car market.

Everybody's a winner in this plan.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects description of government mandate for production of new-energy vehicles in fifth paragraph.)

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net