Israel Corp bets on Chinese car venture

Israel Corp is aiming for the global market as well as China itself with its Qoros cars.

Israelis tend to think of Israel as the center of the world, but the global car industry has a more realistic perspective: Israel amounts to a small blip on the radar screen for most carmakers. However, in two areas at least, Israel is more prominent and Israel Corporation (TASE: ILCO) is largely responsible for both: Shay Agassi's electric car venture Better Place LLC, and the joint Chinese car venture Qoros Auto Co. Ltd. Israel Corp's annual report is one of the few public sources for obtaining an in-depth picture about the ventures.

The Chinese-Israeli car is coming

Qoros, owned in equal shares by Israel Corp. and China's Chery Automobile Co. Ltd., was officially launched in late 2011. Israel Corp's financial report adds many new details, which paint a fascinating picture about a unique car venture. We will risk our reputation and bet that if the project moves forward as planned without unanticipated problems from the global economy, it could become the most important venture of the Chinese car industry as a whole in the coming years, and possibly even one of the most important ventures in the global car industry.

The reason is a mix of location and timing. The Chinese car market is now the largest in the world, and although its growth dropped to single digits in 2011, the 12 million new cars sold were just the tip of the iceberg. Although dozens of carmakers are operating in China, most are burdened by history: obsolete plants, old models, R&D centers that are sometimes decades behind their Western peers, surplus manpower that limits the ability to automate, and dependence on past and present Western partners for know-how, which creates constant friction on patent rights.

Qoros begins with a blank page, in the form of Western car companies. It has hired hundreds of Western engineers and designers, makes intensive use of European outsources to develop its cars, it has built a brand new 50-acre factory the likes of which have never been seen in China, uses state-of-the-art Western technology, and most of all, it complies with the latest Western standards to ensure a smooth entry into the most demanding Western markets.

Qoros has only unveiled its first prototype - a family sedan. Development of the model is complete, prototypes are already on China's roads, but Israel Corp's financial report reveals that this is just the first family model under development by Austria's Magna Steyr AG & Co KG, one of the largest contractors for European carmakers.

The future Qoros CF series will include a hatchback, which is in the advanced development stage. There will be a road/off road version, and a hybrid version that will apparently use a plug-in hybrid model, based on the GM Volt. Israel Corp. says that is a precursor for a full electric car, which is also in the advanced predevelopment stage.

A $3 billion investment

As of March 19, Israel Corp. and Chery have invested $624 million in Qoros - not a huge sum in terms of the car industry. But this is probably only the start. The financial report says that Qoros is seeking $1.5 billion in outside financing, apparently from banks. This is already big money, which will enable the new company to be a global player.

A hint at Qoros's global plans can be seen in its production targets: 150,000 cars to 500,000 cars within four years.

According to Israel Corp.'s financial report, the commercial launch of the car in China is slated for late 2013, and that Qoros plans to open scores of dealerships across China over the coming year. The company is also using outside expertise to help develop its marketing concept and set up its post-sales support network.

The financial report has another interesting tit bit: Qoros's collaboration with Hewlett Packard Co. (NYSE:HPQ) to develop a telematics and remote control system for the car. This project is apparently similar to Better Place's project, whose cars are connected by an umbilical cord to the carmaker's control and information system.

As for the Israeli market, although one of Qoros's partners is called Israel Corporation, the miniscule Israeli market has no major role in the company's marketing objectives. Nonetheless, Israel might definitely serve as a testing ground for a soft launch of cars ahead of launches in Western Europe, just as other Chinese carmakers, such as SAIC Motor Corporation Ltd., have done.

As for standards, the main obstacle to importing Chinese cars to Israel are already being taken care of. Israel Corp. says that testing of the first Qoros prototype is already underway, including safety, fuel conservation, and noise insulation. "As of the date of the report, the prototype meets or exceeds European motor vehicle requirements, such as a 5-star rating by Euro NCAP tests," says Israel Corp. Another hint of Qoros's global orientation is seen in the prototype's tests, which are also underway in Austria and Sweden, as well as in China.

A point of friction in Chinese-Western trade relations

The unseen strategic factor, which Israel Corp. did not mention, but which carries great weight in the future success of Qoros, is the Chinese government. China's car industry is under total control of the central government, and it can definitely be assumed that Qoros could not have reached where it is without strong government support.

At the moment, Qoros is swallowed up by the background noise of China's scores of carmakers, but if the Chinese government decides to give it full support and make it the spearhead of Chinese car exports to the West, Israel Corp.'s young venture will be a major point of friction in trade relations between China and the West.

Better Place between the lines

Israel Corp.'s financial report also discloses some details about the development of its second ambitious global car venture - Better Place. As a private company, public information about Better Place is usually local or filtered - i.e. information that the company wants to be published. Israel Corp. discloses some interesting new details, such as the fact that, in addition to deployment of the infrastructure, Better Place might make Australia a target for production and development of electric cars with replaceable batteries, on the basis of the popular Holden car.

For the first time, the financial report mentions concerns about developments in Europe. "The crisis in the EU and its repercussions on other countries and markets are liable to adversely affect the ability of Better Place to raise capital," says Israel Corp. "In addition, if this crisis worsens, it may affect customer demand, and consequently it is liable to cause a drop in expected sales."

More interesting details about the development of the Israeli electric car market are found in the financial report of Renault and Nissan importer Carasso Motors Ltd. (TASE: CRSO), which is Better Place's partner in the marketing and maintenance of the Renault Fluence ZE electric car. Although Carasso does not consider this partnership as material to it revenue in the near term, it is determined to get its foot in the emerging electric car market independently, without the need for sharing the franchise and profits.

Carasso said that it soon plans to market in Israel the Nissan Leaf electric car, which could quite possible put a spoke in Better Place's marketing wheels. The Leaf is a proprietary battery-based electric car that is similar the Fluence ZE, but it offers a simpler fast recharge alternative to Better Place's complicated battery replacement system. The Leaf is based on a buy and drive battery and full ownership of the car, without dependence on outside service providers. Given that Carasso has all the experience and spare parts necessary to maintain electric cars, it will be a serious in-house rival. That said, car industry sources believe that the Leaf will mainly target low-use customers, in contrast to Better Place's Renault Fluence.

Published by Globes [online], Israel business news - www.globes-online.com - on April 3, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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