Given China’s astonishingly rapid rise in the global auto industry, there is no shortage of optimistic forecasts for its electric vehicle (EV) market. Consultants at McKinsey, for example, forecast that by 2030 EV sales in China will reach between RMB 700 billion and RMB 1.5 trillion (US$105 billion and US$225 billion), making China the world’s largest market for EVs as well as for vehicles with conventional internal combustion engines.
Such bullish predictions owe much to the support of China's government for EVs. Beijing intends to invest RMB 100 billion in the next 10 years on domestic EV development.“China has great potential to lead the [EV] market because it is in the national interest to go electric, for many reasons: Energy security, air quality and escalation of its car population,” says Bill Russo, senior adviser at consulting firm Booz & Company and former head of Chrysler China.But the government's motivation goes beyond growing concern about thenation's dependence on imported crude oiland international pressure for it to reduce greenhouse gases. Its vision for the sector is also intertwined with its new drive promoting both indigenous innovation and domestic consumption.
Can China's auto industry live up to the heady hopes? EV sales today account for only 0.06% of all vehicle sales in China,and the supporting infrastructure required to ignite the market is sorely lacking. Meanwhile, there are doubts about whether Chinese automakers and suppliers -- best known for low-cost business models that might not adapt to EVs -- will be able to make much headway on their own, especially since the rise of China's auto industry has depended heavily on the involvement of foreign automakers, whose joint ventures account for 70% of all sales today. But this isn't stopping the locals from trying.
'Catch Up or Go Ahead'
The Chinese government’s latest blueprint for the auto sector, which is in the final stages of approval, calls for the country to become the world’s largest EV market by 2020, with five million “new energy" vehicles on the road, 10 times 2015's forecast. Local governments across the country have made note and are running trial EV buses and cars. Not only is that helping generate interest in EVs, but also providing public and private entities with "the rationale to invest in the infrastructure,” says Russo.
Yet despite such local interest, Tianshu Xin, managing director of IHS Automotive Group in China, a unit of Colorado-based research house, reckons Beijing is being overly optimistic. “The government plan is too ambitious," he says. "We expect China to have 510,000 plug-in hybrids and 430,000 battery electric vehicles by 2020.”In that case, EV sales would only be a fraction of the total 20 million passenger car sales in 2020. J.D. Power similarly forecasts that battery electric cars, plug-in hybrids and hybrids will account for about a 2.5% market share in 2015.
But much is working in the local industry's favor. Notably, China’s push toward greener energy has been made without the battle seen in other countries, like the U.S., with a fractious legislature and strong domestic resistance. China’sone-party system “allows the government to provide its financial support and subsidies for EV cars freely, unlike in other countries,”saysXin.
Many experts say China’s relatively short history of private automaking has conferred another advantage over foreign carmakers -- there is no legacy of conventional car development to contend with. “If you really jump into EVs, all your [previous] investments in engines, R&D, production lines for engines, transmissions and so on are gone. That would have a huge impact on U.S., European or Japanese carmakers and component makers,” says John Zeng, director of automotive intelligence and forecasting service at J.D. Powers Asia Pacific.
According to Russo, “If you look at conventional car technology, it is very much dominated by foreign brands. They have 100 years of experience. With EVs, no company has more than 10 or 15 years of experience. [China's manufacturers] have a chance to catch up or go ahead.”
Brakes on Progress
But like their counterparts in other countries, China's EV makers have formidable challenges to overcome, says Zhou Lixuan, research analyst at China Greentech Initiative (GTI), a research organization specializing in the country's clean-tech industries.Take technology. While companies worldwide are struggling to reduce the cost and improve the performance of the batteries EVs use, China's biggest lithium battery-makers -- BYD, Tianjin Lishen Battery and BAK Battery -- lag the likes of Panasonic in Japan and A123 in the U.S., she says.
Chinese EV makers also face major difficulties mastering the advanced level of systems engineering that EVs require. “There is a lot of room for Chinese makers to improve in those areas,” says Xin of IHS. "What is missing most is how to integrate all the systems -- the electric motor, batteries and power management control systems."
Outside the manufacturers' control, the country's recharging infrastructure is a work in progress too, says Pedro Nueno, president of China Europe International Business School in Shanghai and a specialist in the Chinese car industry. “If the market goes crazy for EV cars, there could be large-scale EV production. But uncertainty is in the minds of the consumers: ‘Can I recharge? Where can I recharge? How can I recharge?’” he says. State-owned utilities, including State Grid Corporation of China, China Southern Power Grid and CNOOC, have shown an interest in developing EV charging stations, but they are said to be waiting for consumer demand to pick up before making big moves.
China's local players could be forgiven for feeling hamstrung. Even BYD -- China’s biggest maker of both batteries and electric cars -- hasn’t yet proven its EV commercially. Its pure battery E6 sells for about US$40,000 and its plug-in-hybrid, F3Dm, sells for about US$16,000. No other Chinese EV makers are selling plug-in hybrids or pure battery cars in China yet.As part of BYD's strategy to first focus on government sales, 40 E6s are operating as taxis in Shenzhen, where BYD is based. They can travel in ideal conditions up to 300 kilometers (186 miles) per charge, at a maximum speed of 140 kilometers per hour (km/h), or 87 miles per hour, and consume 21.5 kilowatts an hour per 100 kilometers, according to the company. Although it has launched its F3DM plug-in hybrid and its E6 pure electric car, these vehicles are used only for demonstrations or fleet use so sales have been minor.
The export market is proving equally tough. “As far as I know, BYD has pushed back its original plan to export its EV car, the E6, to the U.S. from the second half of this year to next year,” Xin says. A BYD spokesman insists that the company is sticking to its plan, but with the E6 still in trials, exports to the United States may not be imminent.And assuming BYD succeeds in meeting U.S. safety and quality standards, the E6’s price at just over US$40,000 may not entice consumers.BYD's technology might not either. “People buying EVs in the U.S. are not price shoppers but technology shoppers," says Russo. "I do not think that BYD is leading the technology push, especially overseas.”
Other Chinese EV makers have yet to make a splash. The hybrid sedans from Chana New Energy Auto, the Chongqing-based unit of mini-vehicle-maker Chana Auto Company, have yet to reach the mass market, with only a few dozen being used thus far by local government.
Likewise, Chery, in Wuhu, Anhui, released its first China-made hybrid car in 2009, with sales also limited to local government. But in early November, The South China Morning Post newspaper reported that Chery has just launched its EV, the M1. Chery says the fully electric M1 can travel 100 kilometers on a single charge and has a maximum speed of 120 km/h. The car will sell for between US$22,500 and US$34,530, before government subsidies. The company began taking orders in a handful of cities, including Shanghai, and plans to make its first deliveries by the end of the year.
As for other foreign carmakers, Honda announced in early November that it will begin producing advanced hybrid cars in China to make them more accessible and affordable. Mitsubishi Motors, the first automaker to launch a mass-produced all electric car when it rolled out the i-MiEV in Japan last year, plans to introduce the car to China by 2012. The i-MiEV has a top speed of 81 mph, a range of 100 miles and can be charged from flat to full in six hours.
Japan’s Nissan Motor is aiming to launch its battery electric car, the Leaf, in China next year after introducing it in Japan, the U.S. and Europe later this year. GM plans to sell its Chevrolet Volt plug-in hybrid next year in China after its overseas debut at the end of this year. “These two are very serious about the market. The Nissan Leaf is one of the best pure electric vehicles and the Chevrolet Volt is another good example of a plug-in hybrid,” says Russo. “Delivering those cars and their technology to this market is critical for China’s EV market to take off,” he adds.
A Long Road
Apart from technology issues, the domestic automakers need to close the gap on brand recognition. Recent market research shows that when Chinese car buyers can afford more expensive vehicles, they tend to buy imports or models made by foreign joint ventures. In other words, consumers in China, like most everywhere else in the world, see cars as status symbols. “Foreign carmakers will take the lead in the EV car market in China because consumers are not buying the battery, but a car," predicts Zeng of J.D. Power. "Foreign car companies have built up their brands in China and Chinese consumers are buying their cars because of brand perception and trust in foreign car technology.”
The lack of brand and technology status is galling to China’s policy makers and a key motivation behind the country’s effort to foster indigenous innovation. To ensure technology sharing, the government is likely to require foreign EV companies to have a local partner and cap the foreign stake in their joint ventures at 49%, which is along the lines of what's been required for conventional vehicle joint ventures.
Some reports say China’s draft EV plan could require foreign automakers to share critical technology with local partners in exchange for access to the market. The Asian Wall Street Journal recently reported that foreign automakers were unhappy at the thought of having to yield proprietary information. However, some experts doubt regulators are likely to make such a demand. That said, “since foreign companies have to form joint ventures, there would be strong pressure from the Chinese partners to demand foreign partners share their technology, but not through government regulations," observes Zeng. "Chinese partners will ask their foreign partners to localize critical technology components, so foreign companies will have to share their technology.”
Some experts foresee a larger role for state-owned automakers. Planned investment in EVs by SAIC and FAW, respectively China's number one and two state-owned automakers, dwarfs that made by local private-sector players thus far. SAIC says it will invest RMB 14 billion in EV development over the next five years, while FAW will spend RMB 19 billion on EV and conventional R&D over the next five years. Neither BYD nor Chery have announced future investment plans, combined they have invested less than RMB 10 billion in EV development.
Whether public or private, local EV makers are looking to the government for support. After the central government’s latest announcement of subsidies for individual car buyers of up to RMB 60,000 for all electric cars and to RMB 50,000 for plug-in hybrid cars in five cities -- Shanghai, Changchun, Shenzhen, Hangzhou and Hefei -- several of these local governments unveiled small-scale infrastructure projects. In Shenzhen, charging stations are to be built in parking lots, shopping malls and hotels in the next two years. For such infrastructure to work, however, the government will need to develop standards for EV technology and batteries.
The industry would also benefit from a public awareness campaign. When consumers begin taking into account the energy savings and government subsidies of EVs, demand will grow quickly, predicts Xin. For China's consumers, the switch from conventional cars to EV cars may be relatively easy. For one thing, because most private consumers are only now able to afford their own cars, they may be more open to the idea of EVs than long-time car owners in other countries. For another, many Chinese are used to charging electric bicycles or scooters, so doing the same with a car battery won't be as much of a leap as it would be in other countries.
It’s the whiff of opportunity that will lure the foreign technology leaders, no matter how quickly the domestic players catch up. “Regardless of whether you are a Chinese automaker, like BYD, or a foreign maker, like Nissan or BMW, China offers opportunity to any EV makers, component makers or battery makers that can provide Chinese consumers with the right product and technologies at an affordable price,” says Xin.