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Impact of wholly-foreign-owned companies in free trade zones

A new State Council regulation released in July allows foreign companies to set up wholly-owned enterprises in pilot free trade zones (PFTZ).

These companies include manufacturers of Controller Area Network (CAN) BUS system, electric power steering system, ECUs and battery cells with energy density larger than 110 Wh/kg and a lifecycle more than 2,000 charging. The PFTZ are in Shanghai, Guangdong, Tianjin and Fujian.

The new regulation is an indication of China’s further opening up in the automotive sector but it may have a major impact on China’s power battery R&D and production.

Spurred by the fast growing electric vehicle industry, more and more companies are getting into battery business. Currently, there are about 57 Chinese battery makers, plus global players such as LG Chemical, Samsung SDI and Panasonic. Bosch is also reportedly moving into the power battery business.

Analysts believe that China’s EV batteries still have large room for improvement, which stands to significantly boost EV driving range. Currently, Chinese battery companies are 3-5 years behind their foreign counterparts. Chinese companies will likely to suffer from losing market shares in the short term as wholly-foreign-owned battery companies start production. To help avoid this from happening, Yang Hong, president of a Shenzhen-based Hangsheng Electrics, calls for government support of native businesses by asking Chinese OEMs to source key components for EVs from one or two Chinese brands.

Although the CAN BUS system was originally invented by Bosch, it has been widely applied by OEMs in China. OEMs in China are now driving the further development of CAN BUS. Chinese companies are capable of making CAN BUS, Ethernet and EPS systems for vehicles. But some local OEMs lack necessary confidence on Chinese brands.

On the EPS side, Chinese brands lag far behind the established international companies, such as JTEKT, ZF, NSK, Showa and Bosch. A senior executive of a Chinese EPS manufacturer believes that native brands are not far behind foreign counterparts in technology. The biggest gap is product consistency and brand influence.

Some analysts fear that after further opening up to foreign companies in PFTZs, native companies will further lag behind in technology. Foreign companies may dominate the upstream supply chain of the EV industry. Chinese companies will be stuck at the bottom of the supply chain.

(Translated by Kevin Wang based on author’s original article published in Zhongguo Qiche Bao or China Automotive News)

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