Hertz Global (NYS: HTZ) is on a green mission in faraway China. The U.S. car rental giant recently announced that it will start renting out electric vehicles in the world's most populous country. But given consumers' low-wattage response to electric cars thus far, can Hertz draw profits out of this venture?
Let's have a look.
Hertz, which already runs an EV business in parts of the U.S. and Europe, will be the first non-Chinese company to provide such services in three Chinese cities. General Electric (NYS: GE) will help Hertz build the required infrastructure by installing several hundred charging stations across the three cities.
Hertz will have 25 to 30 vehicles available to rent out by the end of the year. That number's limited by production availability from BYD, a local rechargeable battery maker and automaker. Hertz will use E6 sedans made by BYD, along with local cars made by General Motors (NYS: GM) and Chery Automobile.
The vast Chinese market
China is not just the largest car market in the world -- it also leads growth in traffic and pollution. Of the 95,500 cars being added to the world traffic daily, half come from China. No wonder the Chinese government is paranoid about pollution, making the country's EV industry a top priority.
Hertz's plan aligns with the government's efforts to promote green cars and reduce fuel consumption. The Chinese government will offer incentives and subsidies such as easier access to license plates, which usually cost car buyers a hefty chunk of change. This will help Hertz and consumers alike, since both parties can access cheaper green cars.
In spite of the country's massive vehicle volume, only one in 16 people in China owns a car -- less than the world average. Thus, this market remains wide open for car rental companies like Hertz.
Hertz's business plan covers more area and a broader selection of cars than its local competitor. As of now, three-fourths of China's demand for rented cars comes from corporations, who mainly require chauffeured cars for extended periods. However, this trend has been changing as individual demand for rentals surges.
Speed bumps en route to greener cars
Some might argue that the EV industry faces many obstacles: higher costs, small market size, limited driving range, lack of infrastructure, and other technical concerns, all of which keep Hertz's green-car gamble from turning a profit.
However, with environmental awareness and pollution regulations on the rise in China and around the world, even big carmakers like Ford (NYS: F) and Toyota (NYS: TM) have teamed up to develop eco-friendlier pickup trucks and SUVs. Both automakers aim to meet stricter government fuel economy and pollution standards in the U.S. and elsewhere. Toyota is also planning to shift part of its production to China, further boosting the country's "green" car ambitions.
Jumping into this trend now makes Hertz a leader that others will surely soon follow. Hertz expects to exploit the vast Chinese market and triple its rental revenue there to $10 million at the end of the year. In a country where the top 10 car rental companies occupy less that 20% of the market, Hertz plans to flourish through expansions and acquisitions.
The Foolish bottom line
The Chinese government's keen interest in promoting "green" cars, a vast exploitable market, and this futuristic venture should all benefit Hertz in the long run.
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At the time thisarticle was published Fool contributor Navjot Kaur does not own any shares of companies mentioned in the above article.The Motley Fool owns shares of Ford Motor and Hertz Global Holdings.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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