BYD F6DM plug-in hybrid is slated for debut in China in 2009.
Chinese carmaker BYD debuted three-electric drive models during the 2009 Detroit Auto Show. Pictured is the F6DM, a future plug-in hybrid due out later this year.

High-quality, Affordable Chinese EVs?

The perception of poor quality and safety are very real issues.

By Darryl Siry

I clearly remember a very interesting debate I was involved in while at Tesla. The debate was about the manufacturing strategy for the WhiteStar (now known as the Model S) sedan.

The plan had always been to manufacture the car in the US, but the new CEO was challenging our thinking on that plan. Michael Marks had built an extraordinarily successful company in Flextronics by providing outsourced electronics manufacturing services for its customers. Michael was one of the more knowledgeable people in business when it came to high quality manufacturing in China.

The debate took place at the table in a hotel bar in Detroit with several members of the Tesla team. In order to achieve the necessary cost targets for the car, Michael had concluded that the only solution was off-shore manufacturing, preferably China. Alternatively, he said, you could consider near-shore manufacturing in Mexico, but the cost advantages of Chinese manufacturing were so great that it made the most sense. And the kicker: according to Michael, there would be no trade-off in quality or safety.

The debate at the table was whether it made a difference if we manufactured and assembled the car in China. When Michael posed the question to me, I recall I answered one way and then immediately contradicted myself in the course of the same sentence.

What was happening was the logical mind and the emotional mind were colliding in my head. I accepted the logic that low cost, high quality manufacturing in China would be the best solution to achieve our cost target. The problem was I also knew that the prevailing American consumer sentiment was (and still is) that cars made in China are low quality and unsafe. The part causing the most conflict was that it was clear in the world of consumer electronics and chip manufacturing that low cost manufacturing had been achieved while also maintaining the highest standards in quality. Why couldn’t this be the same case for automobiles?

Today, I find myself concluding that not only can it be the answer, it may well be the best answer that allows for competitively priced xEVs (BEV, PHEV, etc.), which is a pre-requisite for mass market adoption. This is particularly true for xEVs because manufacturing cost pressures are exacerbated by the very high cost of batteries.

One need only look to the developing landscape of Electric Vehicles and Plug-In electric vehicles to realize that the cost issues are still problematic. The highest volume prospect is the Chevy Volt, which GM plans to produce in the hundreds of thousands. Even at that volume, and sharing platform costs with the Chevy Cruze which is planned in the 300,000+ unit volume range, the Volt will still be priced at or above $40,000, making it one of the more expensive Chevy’s ever produced (I consider the Corvette a special case, and essentially a brand of its own). Another aspect of the Chevy Volt that keeps price lower is the smaller, 16kWh battery associated with the series hybrid setup, which offers only 40 miles electric range.

Tesla Motors and Fisker Automotive, both aspirants to the xEV sedan market are targeting price points that are even higher. This is the right business strategy to cover vehicle costs, overhead and distribution, but the total volume of cars at the price points they will compete at is small and dwindling. (Fisker has announced a target price of $87,000 for the Karma, which is to be contract manufactured in Finland by Valmet. Tesla has boldly communicated $57,000 as the price for the Model S as they try to position themselves as a mainstream manufacturer, but in reality I expect that price to be close to where Fisker is when all is said and done. Tesla plans to manufacture the car in the US.)

Other manufacturers are dealing with the cost issue by targeting the “City Car” segment, with cars that are less full featured and intended for sale in urban commuter markets. The lower range, smaller size and lower expectations for utility of this vehicle format achieves a lower price point, but these cars will still be very expensive from a “total cost of ownership” perspective relative to similar ICE cars (excluding the effects of unusual tax and credit schemes)

The only company I am aware of that plans to offer a full-featured EV sedan at a more mainstream price is Miles EV. Their strategy - Chinese manufacturing for both the chassis and battery, with engineering and safety testing managed out of their headquarters in Los Angeles.

Recently, we have seen announcements from Chinese car makers, including BYD and Chery, indicating that they will plan to enter the fray with low cost xEVs in the US in the next few years. These announcements have been greeted in the US automotive press with a very healthy dose of skepticism. The key challenges raised are whether China can produce a car that meets US safety standards or meet the quality expectations of the US consumer. This perception is not based on any cars that have been built for the US market by US companies using outsourced manufacturing. These perceptions are from existing Chinese cars built for the Chinese market, where safety and quality expectations (and regulations) aren’t at a similar level.

But surely people don’t think that the Chinese are incapable of manufacturing cars and batteries to a high quality spec? In reality, a US or European car manufacturer could manage the engineering and quality of a vehicle and manage the manufacturing implementation to a high quality spec using a Chinese partner. In consumer electronics, this happens all the time. For example, look at the back of your iPhone and you will see the words “Designed by Apple in California. Assembled in China.”

And what of the perception of poor quality and safety? This is a very real issue that needs to be overcome by companies that plan to go the route of high quality Chinese manufacturing. A very carefully planned and executed communications strategy can help address the product specific issues that will be raised in the media and among consumers, and can also attempt to influence the overall perception. But the iPhone example is informative here too.

There was once a time when “Made in China” was bad for marketing consumer electronics. Now, the manufacturing origin of electronics is not a significant issue in and of itself. The market for iPhones has not suffered from its manufacturing origins, since the quality and brand appeal is associated entirely with Apple brand. Importantly, Apple protects this brand by closely managing their manufacturing partners in China (and elsewhere) thereby managing the quality of the end product. And the cost? It is estimated that using Chinese manufacturing, Apple is able to manufacture each iPhone at a cost of just $173. I can’t even guess what that number would be if the iPhone was domestically manufactured.

The car industry is just a few decades behind in taking advantage of this opportunity. While the business environment might drive some innovation in this direction to reduce costs, the political environment may prevent any real progress. Outsourcing car manufacturing will translate into less domestic manufacturing jobs, which will be a very sensitive issue for incumbent automakers being bailed out by US taxpayer dollars. Even the startups have heavy incentives through the DOE ATVM loan program to manufacture domestically. Regardless, the significantly lower cost of Chinese manufacturing is too important a factor to prevent an inevitable shift in that direction. With the added cost pressures of xEVs and their batteries, perhaps we will see this shift come first in the market for xEVs.

Former Tesla CMO Darryl Siry writes frequently on his blog about EV issues.

Times Article Viewed: 7838
Published: 14-Mar-2009


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