China is buying electric-car maker Geely to dominate the electric-car market

Electric cars have become a part of the vernacular of global politics. Consider the election of progressive Bernie Sanders. Former House Speaker Nancy Pelosi praised the new electric vehicle program by President Obama in 2010. And President Trump last month promised to build “the biggest and the best battery plant in the world.”

But much more study of the growing global market is required. That’s why the recent announcement of the acquisition of a Danish electric car company by a Chinese firm isn’t about promoting innovation or creating new job opportunities—it’s about taking orders from an expected hungry client base.

At the end of last year, an all-electric model introduced by the Chinese-owned Zhejiang Geely Automobile Company sold 14,000 units. That did not translate into an immediately flourishing market. The car actually made a $40,000 loss, which is why Geely sold the business to Jinhaigang—a state-owned Chinese industrial conglomerate led by Dongfeng Motor Group’s Liu Zhenya, the only Chinese executive in the world of global carmakers.

To put it into perspective, from the BMW 3 Series to the Ford F-150 pickup truck, there are about 40 million autos produced each year. Now imagine that 70,000 electric vehicles are mass produced each year, or up to 200,000 units a year. Why shouldn’t Jinhaigang, with its ample resources, get in the driver’s seat?

This is the topic of a new report by the Center for Automotive Research’s David Cole, called “Today’s Chinese Electric Car Industry.” It is a detailed examination of Geely’s strategy and the dynamics of the market. For example, its average profit margin on the Geely brand is 30 percent.

But the report is also about the competition emerging between Chinese and American automakers. The Chinese auto industry increasingly resembles the state-owned powerhouses that dominate many other industries, as expressed in the report:

“It is not an exaggeration to say that the future of the Chinese automotive industry will be shaped by what happens at Jinhaigang and Dongfeng Electric.”

One consequence of this multi-faceted approach to the global market is the threat of protectionism and technological disruptions. One result: collaboration among Chinese and American companies that contribute to the development of electric vehicles.

Cole notes that firms from the two countries have been collaborating on issues ranging from taxi technology to electric cars.

In terms of market dynamics, Geely’s acquisition of Geely Automobile could pose significant risks to Geely’s long-term reliability, driving up car prices, and also forcing the manufacturer to take on new debt or even to issue stock.

The report isn’t without a positive tone about collaboration between China and the United States, but there is a risk that the industry will not respond to the challenges facing the industry. For example, the report noted that the production of other small electric vehicles from Geely’s overseas dealerships would be halted until Geely completed the acquisition, which could turn Geely dealers into “an island of autos in a sea of high-end Chinese cars.”

Clearly, there is a path forward. Cole recommends the U.S. Department of Commerce take action against circumvention of U.S. antidumping laws, as Chinese firms occasionally get around the law by directly exporting an EV to the United States. He also advocates that the United States monitor current production and sales of Chinese electric vehicles so it is possible to measure their success.

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