China stalls on the road to greener propulsion

Financial Times Special Report: Innovation in Energy, January 14, 2011

By Patti Waldmeir

The West has developed something of an inferiority complex towards China since the global financial crisis, and one area is that of green cars.

Beijing’s decision to throw money at its economy largely prevented the financial crisis spreading to China. But will the same combination of cash and central planning propel the mainland to dominance of the world green car market? Most car market analysts in China say: not within the next decade.

For although the country has recently taken over as the world’s largest market for internal combustion cars, its prospects for dominance of alternative fuel markets have recently appeared to wane.

As recently as 2008, McKinsey, the consultancy, was predicting that alternative fuel vehicles would grab 30 per cent of the China market by 2030, and AT Kearney consultants even predicted that alternative energy motors would capture nearly 40 per cent of the new vehicle market by 2020.

Yet last year Wan Gang, China’s minister of science and technology and a driving force behind the development of green cars, forecast sales of only 1m electric cars by 2020 – only 5 per cent of the 20m new vehicle sales expected this year, and a much smaller percentage of the vastly larger total car market expected by 2020. And JD Power, the car consultancy, was even less sanguine: it forecast late last year that total demand for hybrid and electric vehicles would reach only 472,000 units by the beginning of the next decade: only 2.3 per cent of total passenger vehicle sales.

So it may be time to tone down apocalyptic visions of a Chinese stranglehold on alternative fuel technology. Still, car analysts agree that China is serious about cleaning up environmentally unfriendly forms of transport, and reducing its dependence on expensive and insecure supplies of imported oil.

Last year central government announced that it would offer a subsidy of up to Rmb50,000 ($7,571) for each plug-in hybrid sale, and Rmb60,000 for each pure electric vehicle sold in five big cities. Since then some of those cities have added hefty local producer subsidies as well. Local Chinese media say one Shanghai local government was even considering giving a free electric car to anyone who purchased a property in their district.

This month is likely to bring further news of government support for the industry, with Beijing expected to publish its long- awaited 10-year plan to encourage production of electric and plug-in hybrid vehicles. The government is expected to invest up to Rmb100bn in the sector over the next decade.

“China’s efforts to stimulate demand for EVs are a demonstration of the seriousness of their commitment to the electrification of transportation,” says Bill Russo of Synergistics, a Beijing auto consultancy, and former head of Chrysler in China.

“China views electrification as a national strategy to reduce emissions and increase energy security, as well as a means toward achieving sustainable economic growth.”

Beijing also views green cars as a way to leapfrog over the west’s traditional dominance of internal combustion technology – and make up for all those decades lost to communism, when cars were a rare sight on Chinese roads.

Some industry analysts believe China will never catch up with the US on internal combustion vehicles, or Europe and its diesels or Japan with its hybrids – but in the words of Kevin Wale, China head of General Motors (which recently began selling its Volt hybrid electric cars on the mainland), “China could be the country that leads the world in switching to electric vehicles.”

With its cheap labour, powerful government, and vast auto market to offer economies of scale in green car production, “China could become a pioneer in the conversion of electric vehicles from an expensive niche technology to an affordable, widely used technology,” according to Paul Gao, formerly of McKinsey and now an executive at Chery, the Chinese carmaker, which also has electric-car ambitions.

But Mike Dunne of Dunne & Co, the Asian auto consultancy, says: “Breakthroughs in China are almost never orderly or elegant and its drive for electric vehicles has already experienced some stall-outs, delays and backsliding.”

BYD, long viewed as the leader in Chinese electric vehicle technology, has repeatedly missed self-imposed deadlines for exporting electric vehicles overseas.

And officials of the China Association of Automobile Manufacturers admit most domestic companies lag far behind multinationals in battery technology.

Mr Dunne expects city bus and taxi fleets to be the main buyers of electric vehicles, at least until 2015: “After that, with more charging stations in place, private individuals will have greater confidence to buy electrics too,” he says.

But as Yang Jian, editor of Automotive News China wrote recently: even with 1m electric vehicle sales per year, “electric cars would be a niche – not a mass market”.