Breakingviews: German carmakers step on Chinese electric pedal

German carmakers are preparing for a clean car push in China. Volkswagen will become the biggest shareholder in battery supplier Gotion High-tech, with a nearly 27% stake worth over 1 billion euros, plus buy half of the state-owned parent of Anhui Jianghuai Automobile Group (JAC Motors) for a similar sum. Daimler might back EV battery-maker Farasis Energy’s planned $480 million Shanghai initial public offering. The deals are bold, coming at a time when tepid consumer demand, uneven policy support, and low oil prices have together weakened the outlook for electric vehicles.

EV sales were softening in China before the pandemic hit, and have gotten worse since, falling 27% in April year-on-year even as the wider market recovered. Beijing has reduced the value of subsidies on new energy vehicles by 10%, although it will extend their duration until 2022. Yet VW wants to quintuple its proportion of electric cars to a fifth of total vehicle sales over the next five years. China, already VW’s most significant single car market, is projected to account for around half of the Wolfsburg-based company’s electric sales by 2025, equivalent to some 1.5 million electric vehicles. Moreover, longer-term, it aims to bring down the average lifetime ownership cost of battery-powered cars below that of gas-guzzlers.

That requires VW to massively increase its production capacity. Given the expense of transporting heavy batteries over long distances, VW is aiming to ramp-up local battery production. Buying half of JAC Motor’s parent, and raising its stake in the joint venture to 75%, as well as investing in Gotion High-tech, could pave the way for that.

Gotion High-tech is listed in China, and it isn’t cheap, trading at 58 times forward earnings per Refinitiv data. JAC trades at 68 times. So Volkswagen is probably not buying low. But by locking in equity relationships with key suppliers, both it and Daimler will be better positioned to fend off rivals including Tesla, which, according to Reuters, plans to put affordable batteries with longer life, jointly developed with China’s Contemporary Amperex Technology, into its Model 3 cars sold in the People’s Republic. If China’s clean automobile initiative stalls, the Germans may regret doubling down on batteries. But if the market revives soon, they’ll be fully charged to compete.

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