Engine of growth

They may be allies, straddling either side of the Pacific Ocean, but the US and Japan are adopting different approaches when it comes to technology transfers with China. The Trump administration is determined to put the brakes on the practice as part of bilateral negotiations ahead of potential new trade tariffs in March. But in Japan, one company in particular is accelerating in the other direction.

This follows a mellowing in diplomatic mood that led Chinese President Xi Jinping to tell Japan’s leader Abe Shinzo that relations were “back on a normal track” at a summit in Beijing last October.

The firm in question – Toyota – is licencing its hybrid engine technology to Hangzhou-based Geely through Hunan Corun New Energy, a Chinese battery manufacturer with which both companies have pre-existing ties.

Geely and Corun received regulatory approvals last month for transactions that cement Geely’s control over the company that is getting access to the technology from Toyota.

For Geely the move signals an effort to match its growing market share in conventional cars with a stronger position in the new energy sector. It has already said that it wants to share the hybrid powertrains it develops with Corun with other automakers in a bid to develop the market for gas-electric vehicles. And for Toyota, it marks a further push into China, where it has been closing some of the sales gap on rivals VW and GM.

Confirmation of the tie-up has provided Geely’s share price with a much-needed bounce after it lost nearly two-thirds of its value between November 2017 and January this year (when the Hong Kong-listed shares hit a low of HK$11.10 on January 11). Since then, the stock has risen about 16%. However, it is still trading at only 1.6 times forward price-to-book, almost 40% below its historical average.

At the beginning of January, Geely warned investors of flat sales for the year ahead. But deployment of Toyota’s hybrid know-how could spice things up, forming part of the ‘Blue Geely Initiative’, a five-year plan to sell two million cars a year by 2020, and for 90% of them to be in the new energy sector.

That looks like a serious challenge: Geely sold 1.58 million vehicles in 2018, of which just 4.57% were electric.

However, 2018 was really the first year that it fully committed to the electric car market, with three new models, plus a joint venture with battery manufacturer CATL. Over the coming three years, it plans to roll out 30 new electric cars and sell its first electric car overseas.

The backdrop has stayed more buoyant for NEVs, despite the broader downturn in Chinese car sales. In 2018 NEV unit sales were up 61.7% and were still accelerating in December (up 70% year-on-year).

The Chinese newspapers are also predicting a significant shift in the kind of electric cars sold in the local market. Most of China’s electric cars are either plug-in hybrids or fully electric models. Toyota’s technological lead has been concentrated in hybrids, which have a dual petrol and electric engine (the former charges the latter on the move).

Toyota launched its popular Prius model in 1997, but the main patents have expired. Opening up the technology to Chinese companies is partly a practical consideration that should help to grow its commercial reach.

In 2018 it sold 1.5 million vehicles in China, up 14.3% year-on-year compared to VW’s 2.1% decline and GM’s 10% decline. However, only 10% of the total were hybrids, a figure it wants to boost to 30% by 2020.

In a bid to boost business it has already localised production of key components such as battery packs and motors, allowing it to introduce hybrid models of its Corolla and Levin brands at prices close to their gas-engine counterparts. But Sina Finance adds that the “hybrid market is ready to go” in China because the government is changing it position. Previously policymakers prioritised fully electric cars, but there is a realisation that hybrids have a role to play if green goals are to be met. In their favour: they are cheaper to make and they offer a stepping stone for motorists who are not yet ready to make the full jump to electric.

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