China wants to export ‘quiet transit’ from Brazil – 07/14/2023 – Market

Traffic is intense on the six-lane avenue that cuts through one of the most upscale neighborhoods in the capital of China, Beijing. It’s an April morning, rush hour on a typical spring weekday, and cars and buses jostle for space with a profusion of motorcycles and electric bicycles.

It’s a typical scene of any megalopolis, except for one detail: everything seems to happen on mute: there are no the expected sounds of engines and exhausts.

The environment is so silent that, from the sidewalk, you can hear a driver coughing from inside the car on the opposite side of the avenue.

Though probably just an unintended effect, the well-being brought about by the obvious lack of traffic noise is the first sign anyone visiting Beijing notices that the country’s traffic has undergone a literally silent revolution over the past decade.

A revolution that China has been trying to export to the West from countries like Brazil.

At least two of the most successful Chinese companies in the field —BYD and Great Wall Motors— recently landed in the country announcing billionaire investments. The move has the potential to be the most robust Chinese electric car production plan outside of China.

For Beijing, it is more than an opportunity to advance on a promising and yet unexplored market. It is also the chance to open the lead in the dispute with the United States for technological partnerships with Brazil for the production of essential items such as chips and for the exploration of Brazilian reserves of critical minerals, such as lithium and rare earth metals.

What did the Chinese do with traffic?

More than half of the world’s electric car fleet, which will hit 77 million units in 2025, circulates in China.

In 2022, when the global sale of this type of vehicle reached a record 10 million units, China was responsible for 60% of them – and has already beaten the target set by the government itself for 2025. In comparison, the US accounted for only 8 % of sales in 2022, according to data from the International Energy Agency.

“Fifteen years ago, when China asked itself how it could become a privileged presence in world car production, it realized that it had no chance of competing in conventional combustion vehicles, because there was already high-end production and scale from Europe, from United States, Japan and South Korea. So, the Chinese government decided to differentiate itself by going into electrification, investing in the development of batteries”, says Cássio Pagliarini, automotive consultant at Bright and former marketing director at Hyundai.

“Today, they have ten years of advantage over competitors from other countries both in technology and in battery production price.”

The idea was not just to increase its presence in the automotive sector – the Chinese government realized that the investment could help the country to reduce pollution rates in its cities and strengthen its climate policy, in addition to limiting dependence on oil imports and helping to economy after the 2008 crisis.

China began to create heavy tax incentives for electrified and hybrids and to sign massive state contracts for green public transport, in a process that is still ongoing.

The term “electrified” has been used to refer to cars with some level of electrification, and does not necessarily refer only to 100% electric powered cars.

In June this year, China announced the most ambitious plan to boost the green automobile sector: there will be US$ 72.3 billion (R$ 347.27 billion) in a package of tax incentives over four years.

On the other hand, Beijing imposed taxes on combustion vehicles. The registration of a gasoline car in the country costs a few tens of thousands of dollars and can take years to be approved. The trams, on the other hand, are exempt from any bureaucracy or cost to circulate.

The result was a profusion of Chinese electrified vehicle manufacturers — some estimates put at least 300 of them on the market.

“BYD and GWM, which are big, are already arriving in Brazil, but we know of at least two or three other Chinese automakers that are studying entering the market soon”, stated Pagliarini, who alleged contractual reasons for not disclosing the names of manufacturers who consulted you.

What did the Chinese see in Brazil?

A little over a week ago, BYD, which overtook the American Tesla, owned by South African billionaire Elon Musk, as the largest producer of electric vehicles in the world, announced that it will make an initial investment of R$ 3 billion in an industrial plant in Camaçari , in Bahia, and that “will spare no resources to take the lead in vehicle sales in the country.”

The plant, which belonged to the American Ford and produced the Ka and EcoSport models, but whose operation ended in 2021, was the subject of intense negotiation between Chinese and Americans over the last 9 months.

In practice, the factory has become a symbol of a larger geopolitical struggle between the US and China for influence in relevant global markets. Concluding the deal also became a priority for the government of Luiz Inácio Lula da Silva (PT), who pressed for the deal to be closed during the Brazilian president’s visit to the country, in April, which did not happen.

“In all the meetings we had with President Lula, he said that he has in mind a reindustrialization of Brazil, but he wants this to be done with high technology factories, with very expressive innovation and expressive generation of jobs. And that the president has an ally in China, either as a producer or as a consumer, to reindustrialize Brazil,” former Minister of Cities Alexandre Baldy, BYD’s advisor in Brazil, told BBC News Brasil since the end of 2022.

Both the federal government and that of Bahia launched themselves to mediate between Ford and BYD to break up impasses in the sale. But the negotiations continued for almost three months after the visit of the Brazilian leader to China.

The transaction, closed for approximately R$ 150 million, has not yet been made public by the parties. However, it is considered so certain that it has already led to the sending of more than 40,000 resumes of metallurgists and administrative employees to the Chinese company (the expectation is to generate up to 5,000 direct jobs at the height of the factory operation).

Renovations at the plant should begin in the coming weeks and BYD’s expectation is that its first models with Brazilian DNA will hit the market by the end of next year.

“In five years, we expect to be among the three largest assemblers in Brazil, with a delivery of 300 thousand new units per year and with 70% of each one of them with Brazilian content”, says Baldy.

In addition to the 100% electric model named Dolphin, the company will produce the Song Plus in Brazil, a hybrid that, in the Brazilian version, should have a combustion engine that runs entirely on ethanol.

BYD will face competition from an old acquaintance in Brazil.

AGWM (Great Wall Motors) announced a few days ago the expansion of production capacity from 20,000 to 100,000 units of electrified vehicles per year at its plant in Iracemápolis, in the interior of São Paulo.

The factory, which belonged to Mercedes Benz until 2021, has been undergoing adaptations to start its industrial pre-production on May 1, 2024.

Next week, the brand intends to launch a new 100% electric model in the country, which will join the Haval H6 hybrid SUV and the Poer medium pickup.

“Outside of China, until then, GWM only had small factories in Thailand and Russia, to meet more local demands. GWM’s operation in Brazil will be the first in the West, we have nothing in Europe or the USA. It is an arrival in a new market and an arrival with an investment of R$ 10 billion in investments from the Chinese headquarters here until 2031”, Ricardo Bastos, director of institutional and governmental relations at GWM, told BBC News Brasil, the same position he held for almost 12 years at Toyota.

The interest of Chinese automakers in Brazil combines geopolitical, economic and technological reasons.

In 2021, Brazil was already the largest foreign destination for Chinese investments in the world.

“Last year, the sale of cars in Brazil was 2 million units, but we already had almost 4 million being sold per year, in 2012. Where is there a market of this size not served by Chinese automakers in the world?”, he says. Pagliarini.

According to Baldy, BYD is convinced that Brazil should accelerate the process of replacing the national combustion fleet with electric vehicles, which would open up an even bigger market for the company in the country.

“But Brazil would also serve as an export hub for all of Latin America, with the facilities of Mercosur and, possibly, even for Europe, even more so if the Mercosur-European Union agreement is concluded”, says Pagliarini.

However, Bastos goes further. “Brazil and China have a strategic partnership and the relationship today has evolved beyond the commercial exchange of products, to a transfer of technology”.

GWM and BYD are working with the prospect of producing various parts of the vehicle, including batteries, with Brazilian suppliers. In the plans of the automakers would even be the possibility of supporting the exploration of lithium in the country, mineral also target of interest of the biggest world powers.

Expensive to buy, cheap to drive

At least initially, however, Chinese automakers do not enter the market with conditions to meet all budgets. BYD’s cheapest model, for example, costs almost R$ 150,000.

The explanation for the high price is twofold. First, when entering a new market, companies opt for products that guarantee them a higher profit margin, as is the case with the more sophisticated models, and that allow them to adapt the production scale little by little, to avoid possible losses and damages in the process.

Second, because electric cars cannot, for the time being, compete in price with popular combustion cars.

Pagliarini gives an example to illustrate the situation: “In Brazil, the electric Renault Kwid costs BRL 146 thousand, while the same combustion car costs BRL 69 thousand. they will reach the values ​​of today’s popular gasoline”.

In China, BYD is able to produce its cheapest vehicle at a cost equivalent to R$ 55,000, but it does not foresee that the model will arrive in Brazil for the time being, nor in this price range.

For the consumer who opts for a tram, the financial advantage is when driving: the cost per kilometer driven by a tram is, on average, 20% of the value per kilometer for gasoline, in Brazil.

It makes especially sense for those who drive a lot with the car, such as app drivers. Last week, the individual transport company and app 99 announced that it intends to facilitate the purchase of 300 BYD vehicles for its drivers.

According to Pagliarini, the presence of electric and hybrid vehicles in Brazil will grow in the coming years, but automakers traditionally established in the country are expected to react quickly to possible competition with the Chinese.

“We project that by 2032, between 38% and 40% of the fleet will be in this category. Of these, the Chinese should be around 20%”.

This text was published here.