German private equity investor Mutares is betting on China's automotive sector, a driving force behind the global transition to electric vehicles (EVs), expanding its portfolio of investments that benefit from the go-global drive of the country's carmakers.

China's vehicle electrification journey which began over a decade ago is now accelerating as it gets additional tailwind from the global trend of decarbonisation and sustainability with EVs emerging as a viable and attractive solution to the climate change crisis.

Mutares, which focuses on the acquisition of parts of large corporations via carve-outs and medium-sized companies in transitional situations, is convinced about the country that has now produced and sold more EVs than any other country or region.

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"China is a super important market for us for there is a lot of growth here and we believe this is the motor for the entire economy all over the world," Robin Laik, chief executive of the investment company, told the Post during his three-day visit to China. He said that mainland China's car assemblers and auto-part manufacturers will play a dominant role during the transition of the world's automotive industry toward e-mobility over the next three to five years.

Robin Laik, CEO of German private equity group Mutares, addresses an investor conference on August 1, 2023. Photo: Handout alt=Robin Laik, CEO of German private equity group Mutares, addresses an investor conference on August 1, 2023. Photo: Handout>

"I really think that the next three to five years will be the years of China in Europe [in terms of EV development]," he said.

In contrast with the conventional ICE (internal combustion engine) passenger car market, it is the domestic brands which are dominating the red-hot EV market in China. Eight out of the top 10 original equipment manufacturers (OEMs) by annual sales were domestic controlling 64 per cent market share.

As the global automotive market transitions from traditional ICE vehicles to EVs, suppliers of auto parts must undertake the massive changeover of production from pistons and fuel pumps to batteries and solid-state electronics, consultant EY said in a report.

"The additional value from electrifying a mass-market compact car, either through new components, modules and systems, or through needed modification and upgrades, will outweigh losses by two times," it said while adding that by 2030, roughly 40 per cent of this value increase may be compensated for - mainly due to a significant reduction in battery costs.

Earlier this month, Mutares hosted an inauguration ceremony for a factory built by MoldTecs, one of its portfolio firms engaging in die-cast moulding.

The 25 million euro (US$27.6 million) investment by MoldTecs in Taicang, east China's Jiangsu province, is expected to generate output worth 500 million yuan (US$69.7 million).

Heiko Baufeld, co-CEO of MoldTecs, said the company had strengthened its research capabilities to innovate lightweight materials allowing electric cars to be more safe and reliable and to run longer by making the most of battery power.

Mutares, which plans to open an office in Shanghai, its first on mainland China, in the first quarter of 2024, has increased its commitment to China's automotive industry at a time when global private-equity funds' investment in the world's second-largest economy has shrunk.

As a rise in US dollar interest rates, a slowdown in the Chinese economy and a drop in valuation of mainland companies threaten returns, PE firms have turned cautious.

According to research firm Preqin, US dollar-denominated private-equity funds that invest at least half their capital in China raised US$1.4 billion fresh capital in the first half of 2023, down 89 per cent from the same period a year ago.

"EV sector remains a bright spot in the Chinese economy based on projected fast growth in the coming decade," said Gao Shen, an independent analyst in Shanghai. "Localising production makes sense for global automotive supply-chain vendors since they can better manage costs to compete against Chinese rivals."

Electric car sales in the mainland, the world's largest EV market, will rise by 35 per cent this year to 8.8 million units, UBS analyst Paul Gong predicted in April.

In 2030, three out of every five new cars taking to the mainland streets will be powered by batteries, he added.

Johannes Laumann, chief investment officer of Mutares, said Chinese automotive industry players' go-global drive also creates opportunities for its portfolio firms.

China also dominates the global EV supply chain. More than 60 per cent of batteries powering electric cars worldwide are produced by Chinese companies, with six of them making the list of the world's top 10 in terms of annual production.

Electric-car builders like BYD, the world's largest EV maker, and battery producers including CATL and Gotion High-tech are looking to aggressively expand into Europe.

Mutares, traded on the Frankfurt Stock Exchange, reported earnings of 72.9 million euros in 2022 when it completed 12 acquisitions. Earnings were up 44 per cent on year.

It targets companies in the fields of automotive, technology and engineering, goods and services, and retail and food.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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