Industry Trend Analysis - The New Unconventional Chinese Strategy: EVs in LatAm - OCT 2017

BMI View: Chinese autos producers are betting big on EV production in Latin America, which represents a change in direction compared to their previous regional strateg ies focused on SUVs and commercial vehicle segments . The shift in strategy represents a well-calculated move that will allow them to leverage their own home-grown competitive advantages in the EV space and secure a strong market share in the Latin America EV market before it begins to boom.

Chinese vehicle producers are readjusting their corporate strategies in Latin America towards electric vehicles (EVs) in a bid to colonise the EV market niche before Western brands and before the market begins to boom. The strategy is a strong move for the automakers given the struggles of Chinese producers to gain a foothold in major Latin American markets to date.

Region-Wide EV Strategy Taking Shape
Announced Chinese EV Investments By Company
Source: BMI

The Unconventional Chinese Strategy

In recent editions of our Autos Investment Round-Ups, we have noted a sharp increase in EV investments from Chinese automakers in Latin America ( see ' Autos Investment Round-Up: Latin America The New EV Hub? ' , July 18). With the latest round of investments in Q217, there are now seven projects either in operation, construction or the planning phases that are committed to assembling EVs for Chinese brands or using Chinese EV technology ( see map above). These range from more ambitious investments like Dongfeng's USD300mn new EV assembly plant investment or BYD's new bus assembly plants in Brazil (USD95mn), Argentina (USD100mn), and Ecuador (USD60mn) to less ambitious contract assembly operations like that between JAC Motor and Mexican manufacturer Giant Motors.

Together these projects highlight a new chapter in the strategy of Chinese automakers in Latin America. The Chinese market has become by far the most developed EV market globally thanks to generous incentives and toughening transport policies, with sales of plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs) reaching more than 500,000 units in 2016 ( see chart below). This is now allowing Chinese automakers to leverage their strong experience and economies of scale as EV producers to pursue a new export strategy based on exporting knocked down kits of electric vehicles in order to capture the EV niche in Latin America before other Western or Asian brands make it to market.

Chinese Companies Leverageing Homegrown EV Competitiveness
China - Electric Vehicle Sales By Powertrain, Units & % chg y-o-y
Source: CAAM, BMI

Chinese automakers will not find significant gains immediately given the current small size of Latin America's underdeveloped EV markets. However, over the long-run of five to ten years, it represents a promising growth strategy given that Chinese brands have struggled to establish themselves as significant players in local markets for conventionally-fuelled vehicles.

To date, Chinese brands have often relied on ineffective regional strategies like those based on competing in the oversaturated SUV markets of the region (e.g. Chery), looking to more frontier markets like Paraguay (e.g. JAC Motors) and focusing solely on more heavy commercial vehicle segments (e.g. Lifa n and Foton). These have not, however, led to significant gains for most brands. For example, the combined market share of all Chinese brands in the Brazilian light vehicle market remained less than 1% in 2016 and 3.3% in the Colombian light vehicle market during the first half of 2017.

Thus, despite sales volumes of EVs in Latin America being weaker than other more developed regions, if Chinese automakers can colonise this space before other brands then, within five years, they could still reach sales volumes comparable to their current sales of conventionally fuelled vehicles in the region.

Over a longer time period, as EV prices become more competitive, we expect EV sales in Latin America to eventually follow the broader global trend for EV sales to grow to almost 30% of total car sales by 2025 ( see chart below; see also ' Cutting Through The Hype: The Global EV Outlook ' , November 11 2016). As EV sales take off in Latin America, Chinese first movers will be well positioned to guard their market share as sales volumes reach more profitable volumes provided they can establish a brand recognition amongst consumers and cultivate a reputation of reliability and affordability.

Global EV Trend Will Eventually Play Out In LatAm
Global - Passenger Car Sales By Engine Type (Historic and Forecasts)
f = BMI forecast. Source: IEA, National sources, BMI

Supportive Policy Environment Is Forming

We also highlight that Chinese producers will be helped by the introduction of more EV-friendly industrial policies across the Latin American region. Over 2016 and 2017 so far, governments in a number of key markets have reduced import duties on EVs and their components in an effort to attract more EV production investments including Mexico ( see 'Tariff Removal To Heat Up EV Competition ' , February 15), Brazil, Colombia and, most recently, Argentina ( see ' Tariff Reductions To Benefit Chinese EV Makers ' , August 1). At the same time, the Latin America region's second biggest producer, Brazil, is currently drafting its new automotive industry policy for the 2018-2030 period, which we believe will incorporate incentives for EV manufacturing and sales ( see ' What Will Brazil's New Autos Industry Policy Look Like? ' January 24).

All of these developments are helping to lay the groundwork for strong growth in the nascent Latin American EV market with Chinese automakers proving that they will be the best positioned to capitalise on this.