Johnson Controls’ Banking On China’s Automobile Battery Market

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Johnson Controls (NYSE:JCI) has entered into a joint venture with Beijing Hainachuan Automotive Parts Co. Ltd. (BHAP) to expand production of fuel-saving advanced batteries, besides building a new factory in China to develop batteries for start-stop technology. With the company spinning off its car seating lines and its auto-interiors venture, the company will be focusing more on its auto battery segment, which currently forms close to 40% of our price for Johnson Controls. Joe Walicki, president of the Power Solutions division of Johnson Controls, considers China to be a high growth market for the adoption of its start-stop technology car batteries. The automotive business now has 71 factories in China, more than the number in the United States, growing at a rate of one factory every two months. [1]

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Johnson Controls’ Presence In China

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Johnson Controls has been well-established in the largest automotive market in the world for decades, through joint ventures and strategic partnerships with Chinese companies, as well as its own plant openings. It entered the Chinese automotive battery supply market in 2005 and set up two manufacturing plants in Chongqing and Changxing. [2] The plant in Chongqing city reflects an investment of $154 million and produces 6 million automotive batteries a year. Johnson Controls also increased production of Absorbent Glass Mat (AGM) batteries in its Changxing facility, from 1.5 million to 3.4 million a year. The company has also started establishing a second worldwide headquarters office in Shanghai, expected to open in 2017.

Global positioning

The company has partnered with BHAP, an auto parts subsidiary of Beijing Automotive Industry Group Co. Ltd. (BAIC Group), to set up an automotive battery sales and manufacturing joint ventures in China. It will offer conventional batteries, as well as the start-stop batteries. This agreement follows the company’s decision to set up a $200 million state-of-the art battery manufacturing facility in Shenyang, China, slated to open in 2018. Such an investment signifies the company’s long-term commitment to China, and with the plant the company expects to meet the demand for quality products in a country considered by Walicki to be one of their most important markets in the world. As China adds more cars into the market, the company has an immense opportunity to grow organically.

China’s Fuel Economy Targets Spur Growth

According to Ray Shemanski, a vice president of Johnson Controls, about 40% of new vehicles will be fitted with the ‘start-stop’ technology by 2020, the same year when the Chinese government requires automakers to further lower the average fuel consumption, from the current 6.9 liters per 100 kilometers to 5 liters per 100 km. In order to accomplish this, carmakers have taken to developing electric vehicles or by adding the start-stop system. Currently, such a system, which reduces fuel use by as much as 8%, is present in only about 5% of vehicles. Start-stop technology automatically shuts off the engine when the vehicle is idle and restarts it when the driver’s foot leaves the brake pedal. During this time, the car’s electrical systems use energy from an advanced lead-acid battery (AGM) rather than the gas-powered engine, which results in fuel savings.

China good opportunity

As stated by Lisa Bahash, group vice president and general manager Original Equipment of Johnson Controls, strong growth is expected from this technology as it requires minimal changes to the vehicles, and costs considerably less than battery systems in hybrid or electric cars. It is also the best solution to aid automotive manufacturers to meet environmental regulations.

Another factor precipitating a rise in battery demand is the aging of cars in China. Shemanski believes about 67% of vehicles would have been in use for more than four years in 2020, a typical age necessitating battery replacement. [3]

A Cause For Concern On China’s Bullish Outlook

Johnson Controls is investing heavily in new plants in China and the management expects the country to be the largest automotive battery market by 2020. The company’s assumptions for automobile production in China imply a significant pickup in 2016.

China automotive production

In November, the sales and production continued its recovery, increasing 16.2% and 12.9% more than that of the prior month, and 17.7% and 20% year-on-year. However, for the first 11 months, the production and sales statistics show a measly 1.8% and 3.3% growth year-on-year. [4] Though the Government has put in place incentives to stimulate new car sales, and it does seem to be working, the key question is whether such measures will have the positive effect on production that Johnson Controls expects for 2016.

 

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Notes:
  1. Adient will be the name of the new company spun off from Johnson Controls []
  2. Johnson Controls expands production of Start-Stop batteries in China []
  3. Johnson Controls sees China fuel rules boosting battery demands []
  4. Sales and production statistics of automobiles in China, November 2015, CAAM []