China is in a unique position to develop alternative fuel technologies

Gasgoo.com: Nowadays electric and hybrid vehicles are in the vogue worldwide. While the commercial interests in North America and Europe may continue to keep focuses on internal combustion engines, China's auto industry, with a lot of help from government, would make much more investments in electric and hybrid as a transition technology. Which technology do you think will become the development trend for the auto industry in China? What are the future prospects for new energy vehicles in Chinese market?

Brian Link/Jeff Henning: As I said China has the opportunity to develop alternative vehicles because China doesn't have a long history to make internal combustion engines. Given that development of plug-in, electric or hybrid vehicles are still in their initial stage, Chinese companies are at less of a competitive disadvantage compared with foreign companies. The Chinese government is more willing to invest this field rather than in traditional engines. The government has already taken numerous steps to promote the development of alternative powertrain technology among China's vehicle manufacturers and suppliers.

Another advantage lies in that most passenger vehicles in China are used for neighborhood and city driving, which is ideal for EV applications. And with much of China's infrastructure still being built, the accommodation of EV charging stations is more easily put into place versus the retrofitting approach required in most developed countries.

In addition, it depends on customers need to popularize a new technology. Customers in European are getting used to traditional fuel engine vehicles with more advanced, fuel efficient technologies but Chinese customers, most of them first-time buyers, are more likely to accept new and different things. And when everything being equal, Chinese consumes may naturally gravitate toward a local brand. EV technology may offer the best opportunity to close the technology gap and level, or even leapfrog the playing field.

Gasgoo.com: The Obama administration has decided to boost the US' average fuel economy (CAFE) for new models to 35.5 miles per gallon by 2016. China, on the other hand, is striving to carry out "national IV standard, which is equivalent to Euro I standard, nationwide before 2011. Do you think that environment protection is more important that economic growth? Do you have any advices for China to develop a healthy, environment-friendly auto industry?

Brian Link/Jeff Henning: I don't think one issue is more important than the other. I think they have to be balanced. With the use of modern technology and modern management techniques, it is possible to bring about this balance, to make explicit the trade-off between environmental protection and economic growth. Any growth that is not environmentally benign will not be sustainable.

Regarding the problem of how to develop the auto industry, I think Chinese government can apply skill and rigor to support the auto sector through the judicious application of regulatory, tax and incentive programs, as well as provide direct research and development funding so as to solve issues facing by the industry, for example severe vehicle emissions, too much dependence on imported oil, low level of vehicle exports and a small market share of domestic nameplates. No matter its hybrid, EV or plug-in, China has to come up with a technology ideal to address these issues. As I said previously, I think China is in a unique position to develop these technologies.

Gasgoo.com: China's Beijing Auto and Geely are leading a push among the country's carmakers for bidding overseas brands. Do you think oversea mergers and acquisition are in line with Chinese automakers' long term interests? Latest reports tell that Goldman is investing in Geely just like Buffett's former investment in BYD. Do you think this type of investment would help Chinese automakers boosting their brand image?

Brian Link/Jeff Henning: The investment itself won't help much because these investors have sufficient private equity fund and the investment is a drop in the bucket, but it will help to boost consumer confidence about that brand because even Goldman is confident that it would get their return of assets. Another advice for those Chinese automakers who want to expand overseas is that you must first make investment in China because China is now the world No1 market. If you can win in China you can win anywhere.

I think China's domestic automakers must accelerate their technology development, followed by delivering branding strategies and customer service levels that can convince buyers to consider a domestic product. Of course they can also get some advanced technologies by acquisitions. For example, Geely's recent acquisition of Australian transmission maker DSI provides it with a foothold in advanced transmission technology, and Beijing West's acquisition of Delphi's brake and suspension unit provides another example of a buy versus make approach to technology development. In fact, rather than eying complete vehicle makers and big brands, which efforts were often frustrated due to concerns over job losses and political issues, Chinese homegrown automaker should better buy assets of smaller niche suppliers or technology assets - especially when many global suppliers are in distress and are becoming available on attractive terms.

In dealing with overseas acquisitions Chinese automakers also have to collaborate with big supplier companies such as Bosch and BorgWarner, build relationship with and get support from local governments and industry institutions.

Acquiring entire automotive brands are as attractive, which if done right would allow a Chinese automaker to immediately enjoy the benefits of a global brand. But the automaker has to learn to know how to build a profitable business out of what was a distressed asset, and engage or retain a strong management team.

Gasgoo.com: What successful experience in US market can be learned and applied in China's auto industry?

Brian Link/Jeff Henning: No matter in which market, successful automakers always have some common qualities, which are good quality, branding, services and top management team. Quality is the basis of all the qualities. In the US market I think Hyundai is very successful because of its reputation for good quality. Also GM is very successful in China for Buick brand and so on. Also you have to have the right consumer marketing strategy, a powerful brand image and well protected brand value. All of these experiences can be applied in China as well as other markets throughout the world.