How Daimler Could Capitalize On China’s Push For EV/HEVs

China’s fast growing automotive market is expected to constitute nearly 30% of the global sales by the end of this decade, by our estimates. Increasing disposable incomes and a low vehicle ownership rate of 79 vehicles per thousand inhabitants are expected to drive growth in the Chinese auto industry. In comparison, the U.S. has a massive 791 vehicles per thousand inhabitants. However, with a rising number of automobiles on the roads, China is also facing large-scale pollution and traffic problems. The government has called for restricting volumes of number plates sold in some cities to curb traffic, and has also encouraged sales of electrically-powered vehicles to control pollution levels.

Electric and hybrid electric (EV/HEV) sales are expected to surge in China going forward, boosted by government incentives and improvement of battery-charging infrastructure. Daimler AG‘s luxury brand Mercedes-Benz is the third largest premium-maker in China, behind Audi and BMW, selling 218,045 units in the country last year. Daimler, in partnership with local automakers in China, will now aim to tap into the growth potential of the EV/HEV market in the country. In the first quarter, EV/HEV sales grew by an impressive 120% to 6,853 units, as reported by the China Association of Automobile Manufacturers. ^[1] Sales include 4,095 pure-electrics and 2,758 plug-in hybrids.

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Daimler Expands Into The Chinese EV Market With Denza

In November, Daimler had acquired a 12% stake in BAIC Motor, the passenger car division of its China partner the Beijing Automotive Group, to further its business in the Chinese automotive industry. Daimler aims to achieve growth in China by expanding its sales network, increasing local production and manufacturing specifically designed cars for Chinese consumers. The company has another joint venture with domestic manufacturer BYD for developing electric vehicles. BYD already has a strong presence in China, and leads the country’s PEV market with 43% share, followed by another local company Chery with 30% market share. The Daimler-BYD partnership, which led to the establishment of Shenzhen BYD Daimler New Technology Co., Ltd., will launch the all-electric car Denza in September. ^[2] The DENZA-brand electric cars will be locally manufactured in a production line in Pingshan, Shenzhen, with an annual capacity of 40,000 units. Domestic production will help Daimler evade China’s 25% export taxes, in addition to the value added tax and consumption tax, which combine to substantially raise model prices. Lower prices will enable Daimler to compete with other automakers on a pricing front in China.

Apart from lower taxes, Daimler’s ambitions in the Chinese EV/HEV market are boosted by government incentives. As the country looks to persuade consumers to purchase environmentally-friendly electric vehicles, the government will provide subsidies of up to a whopping $19,000 that can be deducted per Denza electric vehicle. In fact, Denza will be priced at around $59,100, which makes it half as expensive as the Tesla Model S ($117,500). This means that apart from depending on luxury gasoline-powered Mercedes-Benz volumes, Daimler could further improve sales in China in the coming years by expanding into the fast growing electric vehicle market.

The Smart Fortwo ED Could Add Incremental Sales

Daimler launched its Smart Fortwo ED, a battery electric version of the Smart Fortwo city car, in China late last year. China is already the second largest market for the Smart brand, with volumes of the Smart Fortwo rising 21% in the country in April. The two-seater compact electric vehicle was the highest selling EV in Germany last year, constituting 32% of the net 6,711 unit sales. However, with the launch of the new BMW i3 and Volkswagen e-Up!, Fortwo ED was pushed down to third spot in Germany in the first quarter. The Smart Fortwo ED uses a “wallbox” designed by KEBA for battery-charging, and is priced at around 235,000 yuan (~$38,000). ^[3] However, sales of the model haven’t picked up as expected in China so far. The sub-compact car faces stiff competition from the E20, made by the domestic manufacturer Zotye. The Zotye E20 ranks fourth in the country’s EV market, with 396 units sold through April. ^[4] Despite the slow start, the Smart Fortwo ED is only a few months old in the country and could add incremental sales for Daimler going forward, considering the demand for electric vehicles is expected to swell.

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1. 6,853 PEVs were sold in China in Q1 2014, May 2014, chinaautoweb.com [↩]
2. Chinese drivers hesitant to adopt electric cars, April 2014, cnn.com [↩]
3. Mercedes-Benz launches smart fortwo ed in China [↩]
4. China EV sales 2014 [↩]