Testing Tony Seba’s EV Predictions 6 (China Plays Leapfrog)

In 2012, China’s State Council (China’s central government policy-making body) issued a plan with the snappy title “Energy-saving and new energy vehicles industry development planning (2012- 2020)”. It reiterated the target of having 5 million new energy vehicles (NEVs, which includes fuel cells and EVs) on China’s roads by 2020, but backed the mission statement up with a swathe of incentives. The table below is taken from a report by the International Council on Clean Transportation (ICCT).

 

ChinaEVSubsidies

 

So let’s annotate the above table a bit. BEV stands for battery electric vehicles, PHEV for plus-in hybrid electric vehicles. BD refers to the minimum battery-energy density measured in watt/hours per kilogram and ER relates to the minimum electric range of a vehicle in kilometres. At the current exchange rate of roughly 6.4 Chinese yuan to a US dollar, a subsidy of CNY10,000 is approximately US$1,500. So if a maker sells an EV with a minimum range of between 100k and 150k, the Chinese government will give that maker a subsidy of $3,900. Note that unlike many other such subsidy schemes worldwide, the subsidy goes to the manufacturer not the end purchaser.

Another point to note is that since the subsidy scheme was introduced, the minimum BD and ER criteria have been gradually raised, so forcing auto makers to constantly upgrade their EV product if they want to remain beneficiaries of the subsidies.

Two years after the original plan was unveiled, the Harvard Kennedy School of Government came out with a very damning report on China’s EV strategy. If you have ever sat down in a bar or pub next to a petrol head who believes that the height of sexual satisfaction is watching an old episode of Top Gear with Jeremy Clarkson you would get the gist:

  • Cars too expensive as battery costs too high
  • Range anxiety will kill demand
  • Can’t drive cross country as no charging infrastructure
  • If EVs succeed, utilities will need to burn more dirty coal to generate electricity so worsening air quality and CO2 emissions

The report also pointed out two China specific issues:

  • China car industry far too fragmented to support EV push
  • Trade and direct investment barriers to foreign entrants prevents major global auto makers (with better technology) supporting the plan

The Harvard report basically poured a bucket of cold sick over the “Energy-saving and new energy vehicles industry development planning (2012- 2020)” initiative:

“In mid-2013, China had only about 40,000 EVs on the road, more than 80% of which were public fleet vehicles (e.g. taxis and buses). China EV incentives face the same challenges as the rest of the world: high battery costs, long charging times, and no obvious business model for charging infrastructure. But domestic barriers loom even larger. The country has a weak domestic auto sector, counterproductive trade barrier, a balkanized subsidy and infrastructure program, and uncertainty over standards and technology.”

The author was also happy to take a pop at the New York Times journalist Thomas Friedman along the way (since Friedman has got the Tony Seba religion):

“The idea that electric vehicles for private and public use could allow China to leapfrog the internal combustion engine (ICE) and build a clean, high-tech transpiration system was a compelling vision. In 2010, New York Times columnist Thomas Friedman wrote: “It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.” Despite Friedman’s forecast, China remains a long way from meeting its ambitious goals.”

Time to repeat a chart from yesterday’s post:
GlobalNewEnergyVehicleSales2017SCMP

So China has gone from 44,000 EVs on the road in mid 2013 to an estimate of around 2.5 million at the end of 2018. To reach 5 million EV sales at the end of 2020 would require sales growth of less than 50% in 2019 and 2020. It really doesn’t look that difficult. Against the backdrop of these numbers, the Harvard-Kennedy study conclusion looks, well, embarrassing:

“In addition to the unexpectedly difficult infrastructure challenge, it seems the Chinese government was over-optimistic about the technological capacity of China’s domestic automakers. It overestimated the amount of technology transfer that foreign firms had imparted on their domestic JV partners. An absence of data in the Chinese policy making process helps explain why basic driver in the Chinese vehicle market, as well as more tangible issues such as battery costs, were poorly understood.”

Well they must have done something right to have already become the most vibrant and dominant EV market in the world.

On top of this, the Chinese state has recently added a very nasty stick to its tasty subsidy carrot in the form of a zero-emission vehicle credit system for auto manufacturers. The details of this scheme can be found here. It’s certainly complicated, but basically the idea is that every auto maker in China must sell a certain percentage of its vehicles that meet a range of EV standards. Auto makers get credits for those vehicles they sell that meet the necessary EV standards. But if they don’t get enough “New Energy Vehicle” (NEV) credits they can then buy them in from other companies who are more fully committed to the EV programme (and as such have surplus credits).

Imagine a race where all the contestants are forced to run with weights. Subsidies allow the EV contestants to run with lighter weights. Conversely, an NEV credit system means that that non EV internal combustion engine contestants have additional weights attached to their legs.

Moreover, the scheme is quite clever in that it forces Chinese ICE reliant makers to, in effect, subsidise and support aggressive EV makers.

Such positive and negative incentives have consequences; and the Chinese auto makers have responded accordingly. That is the topic of my next post.

 For those of you coming to this series of posts midway, here is a link to the beginning of the series.

4 responses to “Testing Tony Seba’s EV Predictions 6 (China Plays Leapfrog)

  1. How about this for a stick? If they follow through on this, there would be a 60% market share for EVs in Beijing this year. Supposedly they are going to cap the total number of cars at 6.3m in 2020 as well. http://www.chinadaily.com.cn/a/201712/15/WS5a33819aa3108bc8c6734ecb.html

  2. Pingback: Tony Seba’s EV Predictions 7 (Is China Force Feeding Its Citizens EVs?) | Risk and Well-Being

  3. Pingback: Testing Tony Seba’s EV Predictions 8 (The Invisible Chinese Auto Maker Disruptors) | Risk and Well-Being

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s