The second in a two-part series on electric cars. Click here to read the first part.
In America's nascent electric-car industry, there is little doubt that markets will also flourish in China, Europe and elsewhere. Does that mean there will be a sizable export market? American companies are concluding that the answer is no.
The companies that make electric cars, hybrids and batteries still expect to do business abroad, but only by manufacturing on foreign shores, and by giving up the hope that American workers can export to rich foreign markets.
The White House may have had a different plan. In 2010, it jump-started construction of plants that make cars, batteries and the parts that go into them. According to the Obama administration, the United States is on track to produce 40 percent of the world's advanced batteries by 2015.
The industry expects the American market to gobble up much of that supply. But the companies have no illusions of selling U.S.-made cars, or batteries, in foreign markets where demand is forecast to rise sharply.
"Can we export our batteries to China? The answer is no. You have to build them in-country. And China's making sure that it happens by the way that they're structuring incentives," Jason Forcier, vice president for automotive solutions at A123Systems Inc., said at a conference in July.
A123, based in Watertown, Mass., is well-positioned, nevertheless. Last year, the Department of Energy gave it $250 million to expand battery manufacturing in the United States. The company also has a joint venture in China, so it will be able to serve both U.S. and Chinese markets.
That's true for many other battery and electric-car companies, which say Beijing has set policies that effectively block their foreign-made goods. The only way to reach the Chinese market, they say, is to manufacture there and share part of their intellectual property with a Chinese company.
Obama administration forecast auto exports
Europe is the third major market, according to industry experts. But there, too, taxes and regulations on imports can make American products unattractive, Forcier said.
"So European business will be won and made in Europe; Asian business will be won and made in Asia," he said. "Really, the key to growing the battery industry in the United States is, we have to create the demand, right here. Yes, we may not be the biggest auto industry in the world anymore, but the demand has to come from the U.S. in order to create energy independence and jobs in the United States."
It hasn't been clear whether the Obama administration sees electric cars as an export industry.
It definitely sees conventional cars that way. In August, President Obama visited an auto plant in South Side, Chicago, to stump for an SUV.
A federal agency had just given Ford a $250 million loan guarantee with which the automaker would build 200,000 Ford Explorers -- specifically, a model 30 percent more fuel efficient than its predecessor. Then, Ford would sell these Explorers in foreign markets.
Obama told the gathered auto workers of his National Export Initiative, a goal to double U.S. exports by 2015 by reducing trade barriers and helping exporting businesses. Then he got to the heart of the matter.
"We're tired of just buying from everybody else -- we want to start selling to other people, because we know we can compete," he said to applause. "That's how we're going to support millions of good jobs for American workers to do what they've always done: build great products and sell them around the world."
Yet as electric cars arrive, the world auto market is changing. Last year, with two of the Big Three auto companies struggling through bailouts, the U.S. market shrank 20 percent, according to a Commerce Department report.
U.S. car market shrinks; China is now the largest
At the same time, the Chinese market grew 46 percent to become the largest in the world.
Thanks to the slump in the world economy, U.S. car exports took a hit: They fell about 40 percent in dollar terms.
But exports to China grew 5 percent. "The only bright spot for the U.S. vehicle export market was in exports to China," the Commerce report says.
Hybrids and electric vehicles are also expected to boom. Pike Research, a clean-technology consulting firm, forecasts that China and the United States will be the world's largest markets for EVs, with 27 percent and 26 percent of the global share, respectively.
Where will those cars be made?
Historically, most cars haven't been traded across borders; they are too heavy to ship long distances, and countries have raised steep trade barriers to protect their domestic companies.
Tariffs run especially high in developing countries. On average, "passenger vehicles" face a 25 percent tariff, according to a forthcoming paper from the Geneva-based International Centre for Trade and Sustainable Development.
"Today, the world global market is not open. Electrification doesn't make that any easier," said Nancy Gioia, Ford Motor Co.'s director of global electrification. "If you look at the markets that we recognize as relatively closed markets ... they remain relatively closed markets."
Companies work on a Chinese puzzle
In China, for example, selling an EV means a Chinese company must be involved in one of the three "core technologies" -- its motor, power electronics, or battery. These are the most valuable and expensive parts of the car.
What counts as "involvement"? American companies said they're not sure: The law says a Chinese firm must have "a firm grasp of the technology."
A123's Forcier took that to mean a foreign company must enter a joint venture with a Chinese firm, and that the firm has to have substantial ownership of the intellectual property. Otherwise, there will be a duty on making the car in China.
A123, for example, has a joint venture to produce batteries with SAIC, one of China's largest automakers. SAIC has a 51 percent ownership share, so A123 batteries made in China will be considered "local content" and will pay no duty.
Partnerships are common in the battery industry of late, said Vishal Sapru, industry manager for energy and power systems at Frost & Sullivan. They're signed partly so that auto and battery companies can share technology and figure out a recipe for an electric car. But it's also a way to improve access to those companies' national markets.
In particular, car companies have linked arms with the major battery producers, most of which are in the consumer electronics area, currently the largest market for lithium-ion batteries.
Daimler, the German truck and bus builder, has joined BYD, one of the biggest battery producers in China. Toyota has partnered with Matsushita Electric and Panasonic, titans of the electronics world. Volkswagen has a relationship with Toshiba.
Yet such relationships, if they involve U.S. firms, may make American policymakers squeamish. A123's battery is based on innovations from labs at the Massachusetts Institute of Technology, and it's considered among the best in the business. Now, at least some of its blueprints will be shared with Chinese manufacturers.
For now, rather than press the legality of these laws, American companies are trying to find business models that will work in China.
"Our plan is to produce the vehicles in the region where the demand exists," said Ford's Gioia, referring to China as well as other major markets.
Europe, she said, presents far less treacherous trade policies. At least in the early stages, before the European market reaches scale, Ford will make battery packs for the European market in Rawsonville, Mich. The vehicles themselves will be waiting in Valencia, Spain.