August 22, 2009
by Bill Russo
The global economic crisis presents the world with a compelling case for change, and truly transformational changes often occur during times of crisis. The economic crisis is a triggering event that freezes debate on whether change is needed and creates opportunities for collaboration between government and industry. Such collaboration is essential for the successful transition from the conventional internal combustion engine (ICE) to new energy vehicle (NEV) technology.
As we have described in detail previously, the balance of global economic power has been shifting eastward to places like India and particularly China. Most of the recent growth in the world’s auto industry has been in the Asia-Pacific region, and more than half of that growth over the next decade is forecasted to come from China. Since 2003 China's vehicle market has more than doubled in size from 4.56 million units to 9.67 million units in 2008. In this time period, The passenger vehicle (extract the buses, trucks and other commercial vehicles) share has grown from 50% to over 60%.
Given the recent economic downturn, the China government undertook a series of focused stimulus actions designed to help achieve a GDP target of 8%. Through the first half of 2009, these measures already had a dramatic impact on the automotive market as Chinese consumers – many of whom were first time buyers – took advantage of tax and other incentives that were made available. For the first half of 2009, China surpassed the U.S. in total car sales, posting sales of 6.1 million units against 4.8 million vehicles sold in the U.S. from January through June.
China’s rapid automotive growth is expected to continue. The market is forecast to account for more than half of the Asia-Pacific market expansion over the next decade, with over 6% annual growth through 2018. As China’s auto market continues to grow, pollution significantly increases while China’s self-sufficiency rate of crude oil continues to decrease. To encourage the use of more fuel-efficient and less polluting vehicles, the central government’s 2009 stimulus plan included objectives for increasing the proportion of smaller vehicles in the China market. Related initiatives include a 50% reduction in the sales tax for under 1.6-liter vehicles, additional taxes on larger vehicles, and a relaxation of restrictions on small cars. The government’s stated objective as part of the plan is to achieve a market share target of 40% for 1.5-liter engine vehicles and below, and a share of 15% for vehicles with engines at or smaller than 1.0-liter. Overall affordability as well as the shift toward consumer versus institutional sales will also continue to support the development of smaller vehicles.
As the size of the auto market inexorably expands, China will play an increasingly key role in the development of new automotive technologies. China’s emergence as the leading automotive market in terms of sales has several implications. While most attention has been paid to relative sales performance of the foreign and domestic companies, what is arguably of more long-term significance is the impact of China’s market expansion on energy consumption and environment. Ten years ago, Bejing, Xi’an, Shenyang, Shanghai and Guangzhou were already listed among the Top 10 cities with the worst air pollution. The massive growth of the automotive market only adds to the problem. Additionally, China imports two-thirds of its oil, and its ever-increasing thirst has had a dramatic impact on global energy prices. No doubt, China has a clear and compelling need to reinvent the propulsion technology of the automobile.
To address this, China’s stimulus measures are targeting initiatives to increase energy efficiency and reduce greenhouse gas emissions by reducing energy intensity, increasing the share of renewable energy used, implementing tough auto emissions standards, and adding investments for clean energy. China’s Minister of Science and Technology, Mr. Wan Gang – a former automotive development engineer for Audi – has recently unveiled a plan to support the development of what China calls “New Energy Vehicles” (NEVs). The Ministry of Science and Technology, working with the Ministry of Finance and the National Development and Reform Commission, is sponsoring an ambitious plan to promote the use of NEVs initially targeting 13 pilot cities, which include Beijing, Shanghai, Chongqing, Changchun, Dalian, Hangzhou, Jinan, Wuhan, Shenzhen, Hefei, Changsha, Kunming, and Nanchang. The plan includes support for the development of energy-saving technology for use in government fleets, including buses, postal, and sanitation vehicles. The plan targets the deployment of 60,000 energy saving vehicles in China by 2012.
Both universities and vehicle manufacturers have already responded to the government initiatives. For example, Tsinghua University has established an alternative powertrain research lab. Chinese auto brands are participating in NEV development (some with foreign partners) and have included plans in their long-term strategies. Developments include the following:
- SAIC: Invested RMB 2 billion for NEV development
- Chang 'An: Established NEV JV and plans first hybrid car for 2009
- FAW / DFM: Have hybrid buses in pilot operation
- Chery: Introduced plans for the hybrid car A5 and electric car S18
- BYD: Introduced plans for the F3DM dual-mode electric car
Replacing internal combustion engines with other technologies- such as hybrid electric, full electric, hydrogen powered vehicles or clean diesel - requires collaboration between business and government to develop the infrastructure in tandem with development of the technology. The economics of the product itself and ultimate market acceptance is very much dependent on the availability of the infrastructure to recharge or replenish the fuel. It’s not realistic to expect a company to reinvent the technological underpinnings of the automobile unless there is a concurrent development and investment in the infrastructure to support that new technology vehicle. This is especially true in today’s weakened global economy.
As the largest automotive market, and because the China government has the capacity and willingness to invest in the infrastructure for alternative propulsion, the technology will eventually come to the market. What makes the development of alternative propulsion technology particularly challenging is not simply the vehicle itself - but the need for invention of the infrastructure for delivering renewable sources of electricity and installation of battery charging/replacement stations.
As the largest car market, and the place with the largest need for alternative energy solutions, we can expect to see China place a heavy emphasis on development of the electric vehicle (EV) infrastructure. The country that leads the development of this infrastructure will undoubtedly lead in attracting the investment in development of the technologies that plug in to that infrastructure.
Consumer acceptance of new energy vehicles is yet another challenge. While the infrastructure investments already described will help tip the scales in favor of new energy vehicles, consumers must also be convinced that the price and performance of the new energy vehicle can in fact meet their expectations. As a national priority, we can expect the China government to help by offering incentives for the retail consumer to purchase new energy vehicles. Chinese consumers have less experience with gasoline-powered cars, and are already accustomed to short distance, low-speed commuting – conditions very favorable for electric cars.
The China government’s willingness to invest in the infrastructure to support alternative propulsion technology will ultimately help drive market acceptance. This is where China has the opportunity to take the lead, and that will drive investment in new technology. It takes a combination of business and government working together to make such a transformational change possible – and nowhere in the world is there a closer link between business and government than in China.
In the next posting in this series, I will describe the "Utilization of China's Automotive Capacities for Global Expansion".
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