Photographer: Qilai Shen/Bloomberg

Toyota Hybrids May Have Finally Cracked China

  • Local production gives Toyota a price edge on hybrid lineup
  • Toyota, Honda see hybrids as key to hitting emission goals

For years, Toyota Motor Corp.’s lineup of hybrid gas and electric powered cars faced a great wall of indifference in China. Taxes on imported components drove up the price of franchise brands like the Prius way beyond the budgets of most car buyers, while the government steered subsidies to plug-in electric vehicles.

Toyota may have finally cracked the code. The Japanese automaker’s decision to localize its production of powertrain components such as battery packs and motors in 2015 has allowed it to introduce hybrid versions of its Corolla and Levin brands at the same price as their gas-engine counterparts.

On top of that, the Chinese government is now elevating the importance role of hybrids in its push to hit aggressive emission targets by 2020. Toyota sees an opportunity. “Toyota is showing other carmakers that hybrids have a role to play to help reach the emission requirements,” said Zhou Jincheng, an auto analyst at researcher Fourin Inc.

Deliveries of combined gasoline-electric cars more than tripled to a record 111,981 units in 2016 from a year earlier, according to market researcher LMC Automotive. About two thirds of the sales were from Toyota’s Levin and Corolla hybrids, whose key components have been locally available since 2015.

The surge in hybrid demand -- admittedly from a low base -- comes in the aftermath of scandal in the Chinese electric vehicle industry, which has been accused by government inspectors of padding sales and faking transactions to get government subsidies.

President Xi Jinping’s administration wants 5 million “new-energy vehicles” -- either fully electric, plug-in hybrids or fuel-cell vehicles -- hitting the roads by 2020 to reduce tailpipe emissions and a national reliance on imported oil. Central and local governments have spent 15 billion yuan ($2.3 billion) subsidizing new-energy vehicle makers since 2009, according to state-run China Central Television.

Carmakers will have to cut gas consumption by 26 percent from the 2015 level to meet the government’s target of 5 liters per 100 kilometers by 2020, according to an estimate by Sanford C. Bernstein & Co. The government plans to phase out subsidies after 2020.

To get there, the Chinese government last year elevated the role of hybrids by setting its first sales targets for the segment, Bloomberg reported. The aim is to have hybrids account for 8 percent of total passenger vehicle sales by 2020 and rise to 20 percent by 2025, according to the Technology Roadmap for Energy Saving and New Energy Vehicles, drafted for the Ministry of Industry and Information Technology.

More Offerings

Toyota showed two China-focused concept models sharing the basic design of the Camry and CH-R at the Shanghai car show. The automaker is also introducing the LS 500h hybrid sedan.

“Current Chinese rules focus on new-energy vehicles, but we still believe that hybrid is a very effective technology for dealing with China’s vehicle emissions regulations,” Hiroji Onishi, Toyota’s China chief, told reporters on Wednesday. The company plans to raise the ratio of hybrid sales to more than 30 percent of total China sales by as early as 2020, he said.

Before last year, Toyota and Honda Motor Co. were the only carmakers selling hybrids in China, delivering a total of 36,540 units in 2015. After local production of key components, Toyota sold more than 70,000 units of Levin and Corolla compact sedans, which consumes 4.2 liters of gasoline per 100 kilometers, in 2016.

That same year, at least five automakers added conventional hybrids to their lineups in China, including General Motors’s Chevrolet Malibu XL, as well as the Ford Mondeo and Nissan Murano.

Yet unlike Toyota, other hybrid makers with no local production face a 25 percent customs tax on imported cars and components. For example, a hybrid Nissan Murano starts from 297,800 yuan, compared with the 238,800 yuan starting price for a gasoline version. Toyota has struggled to sell its Prius, which has no localized production for the same reason. A Prius starts from 229,800 yuan to 269,800 yuan, on par with a luxury Audi Q3 SUV.

At the Shanghai show, Honda said it will introduce a hybrid version of its CR-V model first in China later this year to meet Chinese fuel efficiency standards, according to Yasuhide Mizuno, Honda’s China chief. Nissan’s planning to bring its e-power technology, a hybrid design which allows the car to run on a motor powered by a gasoline engine, to China, said Jun Seki, the carmaker’s China head, in an interview.

Domestic Carmakers

Chinese carmakers are also developing their own hybrid cars. Zhejiang Geely Holding Group Co., owner of Volvo Cars, late last year introduced the Emgrand EC7 hybrid, whose powertrain was jointly developed with Hunan Corun New Energy Co., a supplier to Toyota. Anhui Jianghuai Automobile Group Corp also unveiled in Shanghai a hybrid version of its new flagship crossover S7, the carmaker’s first conventional hybrid model.

Geely and Corun said they will share the hybrid powertrain technologies, dubbed CHS as in China Hybrid System, with other companies that want to develop gas-electric vehicles. Chongqing Changan Automobile Co. and Kunming Yunnei Power Co. have already joined the technological alliance.

Wang Yanbin, general manager of the joint venture, said this month the companies have reached a supply agreement with several domestic carmakers and will soon start delivery. In addition, a plant with an annual capacity of 300,000 units will start operation in 2017.

Good Intentions

Whether the government promotion efforts for hybrids will include subsidies is unclear. Some Chinese cities such has Beijing and Suzhou used to dole out subsidies as much as 100,000 yuan for electric cars, while hybrids were not eligible for such rebates in most places.

Premier Li Keqiang has been vocal in his support for alternative-energy cars, with its ambitious goal to have 5 million “new energy vehicles” on the roads by 2020.

“Overall speaking there is some imbalance between supply and demand in China. The government distorted the relationship between supply and demand by fabricating demand for pure electric vehicles,” said Zhong Faping, chairman of Corun. “Premier Li is calling for making our skies blue again and the advanced hybrids can help a lot with that mission.”