China goes all out to be king of the electric car
But will drivers embrace battery-powered vehicles before the lavish subsidies run out?
YU NAKAMURA, Nikkei staff writer, KAZUYUKI OKUDAIRA, Nikkei senior staff writer, and KEN MORIYASU, Nikkei Asian Review chief desk editor
GUANGZHOU/TOKYO -- After spending a dozen years working as a successful executive in the auto industry in China, Daniel Kirchert had something of a revelation. It was 2015, and the veteran of BMW and Nissan Motor was awed by a wave of change washing over his century-old industry.
"I had a strong feeling," he said. "The future is electric, the future is smart cars, the future is autonomous. And the traditional companies are not moving fast enough."
Before the year was over, he and a former colleague from BMW, Carsten Breitfeld, had decided to launch their own luxury electric car company. In just 22 months, they have raised $320 million, lured talented engineers from companies like Google and Tesla, and are preparing to show off their first prototype in January. And while their company, Byton, has offices in Munich and Silicon Valley, there was no question where their headquarters would be: China.
The decision was cemented after a meeting last year with Wu Zhenglong, who as Communist Party Secretary of Nanjing was promoting a fleet of electric buses and taxis in the ancient capital of east China's Jiangsu Province. "The supply chain was good, the logistics were good and we have very strong support from the local government."
That support comes straight from the top. Kirchert had heard from his many contacts in the Chinese government that both President Xi Jinping and Premier Li Keqiang, the top two leaders of the world's most populous country, were strong supporters of electric vehicles.
"China sees an opportunity to leapfrog to the global stage," he said. "It's about making China more green, getting the pollution under control and building up a global player. ... The government sees a disruptive opportunity."
Disappointed by its failure to build a world-class brand in the gasoline and diesel car markets, China is determined to dominate electric vehicles. With the same vigor it showed in industries from steel to solar, China is backing electric vehicle manufacturers and battery producers with huge subsidies. Already the world's largest electric vehicle market -- there were about 250,000 battery-powered passenger cars sold in the country last year -- China is now determined to steal a march on competitors from Tokyo to Detroit, Silicon Valley to Frankfurt.
It is moving to build a network of up to 800,000 charging stations, while also changing the rules for automakers to prod them into building more electric vehicles in the country. And while much has been made of Elon Musk's promises to turn the electric car into a mainstream product with Tesla's new Model 3, Beijing's massive push ultimately could have far greater impact on whether the market really takes off.
For years the "bad boy" of climate change, emitting the highest level of greenhouse gases but reluctant to accept restrictions to its economic activity, China has now reversed course and is aiming to be the world's leading eco-car nation.
"The Chinese government wants to turn the tables in the era of electric vehicles," said Tang Jin, a senior research officer at Japan's Mizuho Bank.
Setting the rules of the road
At the end of September, Beijing announced one of the toughest regulations on new-energy vehicles on the globe. Starting in 2018, car companies will be measured against a credit-score program tied to the production of NEVs -- comprising electric cars and plug-in hybrids.
To gain a positive NEV score, car manufacturers must make enough new-energy cars to accumulate credits higher than 10% of their traditional vehicle output by 2019, according to the Ministry of Industry and Information Technology. The proportion will be 12% in 2020.
Electric cars that run more than 300km per charge will be given the highest score, 4.4 credits, followed by shorter-running electric vehicles and plug-in hybrids, which will only be given 2 credits.
If top car brands such as Volkswagen and General Motors, who each sell about 4 million vehicles a year in China, were to meet the quota with electric vehicles only, they would have to produce around 100,000 cars a year. Were they to opt to produce plug-in hybrids, they would have to manufacture even more cars to meet the credit requirements. Establishing a supply chain for parts and procuring batteries and motors to sustain such a large lot will be a steep challenge.
The announcement came just weeks before a twice-a-decade national congress of the Chinese Communist Party, where President Xi plans to solidify his grip on power and signal to the world his policy priorities.
Automakers will also be scored based on the average fuel consumption of the traditional models they make. Any surplus credits can be sold to other carmakers.
The credit system is likely to bode well for China's top electric vehicle maker, BYD.
BYD's CEO Wang Chuanfu told reporters in September that "as a top manufacturer we will likely benefit" from the government's new policy. Some calculations show BYD, in which Warren Buffett's Berkshire Hathaway owns a stake, earning 14 billion yuan ($2.10 billion) off credits in just the first three years under the new rules. Expecting a bonanza, investors have pushed BYD shares up by as much as 70% in the past month on the Hong Kong Stock Exchange.
China overtook the U.S. to become the world's largest automobile market in 2009 and has kept the title ever since. However, foreign brands still dominate the Chinese market. While China is at the forefront of LCD TVs, smartphones, semiconductors and most recently OLED TVs, it has not made an impression in cars.
Chinese policymakers have blamed their failure to build a world-class car brand on rules that prevented foreign automakers from holding more than 50% of a joint venture with local companies. The idea was that the local carmakers would absorb technology and management know-how, but the result was a domestic industry that just could not compete with the BMWs or Volkswagens.
New battle with foreign automakers
Earlier this year, China set out to change those rules. "We cannot make the same mistake again," a source close to the Chinese authorities said. Under the new scheme, foreign automakers are allowed to increase the number of local partnerships they can have from two to three -- as long as the resulting joint venture produces and sells electric vehicles and other eco-cars under a new Chinese brand.
VW became the first automaker to be given the green light for a third tie-up, pairing with state-owned JAC Motors. But VW was not allowed to use its SEAT brand in the joint venture, since China's goal is to build its own brand -- not to promote foreign ones. Ford Motor, Renault-Nissan and GM have also set up or expanded their partnerships in China to build electric vehicles.
In another sign of its ambition, the Chinese government last month announced plans to eventually end sales of gasoline and diesel cars, following decisions by Britain and France to end sales of internal combustion engines starting in 2040. China did not set a target date, and there are doubts about how realistic the plan is given the size of the country's auto market. The British and French auto market stands at 2 million to 3 million cars a year, while new car sales in China exceeded 28 million last year.
Along with India's pledge to have electric models make up 40% of the vehicles on its roads by 2032 under its "Transform Mobility" plan, these initiatives have led many to believe that electric vehicles are nearing a tipping point. Some automakers have their doubts, noting that battery technology and the construction of charging station networks are lagging far behind the political rhetoric. "Talk about electric vehicles seems to be overheating a bit these days," said Yoshiyuki Matsumoto, president of Honda R&D, the research arm of Honda Motor.
Jump-starting the market
When Volvo Cars announced in July that every new model it made would be electrified starting in 2019, it was the boldest public commitment yet from a leading automaker to ending the internal combustion engine era. It also cast attention on the ambitions of its Chinese owner, Geely.
Hakan Samuelsson, Volvo's chief executive, told The Nikkei in an interview that there were advantages to moving quickly. "We chose to be open about this. We want to be early," he said, so Volvo can secure a supply of batteries and other key components.
Volvo plans to roll out five electric cars by 2021, with the first debuting in 2019 under the new premium electric vehicle brand Polestar. Samuelsson expressed confidence that electric vehicles will take root and that their prices will be equivalent to those of conventional cars by 2025. "Customers are asking a lot about electric cars today," he said. "They find electric cars attractive. I think you also have to admit that Tesla has been a stimulus or injection into this car business. They've made very attractive electric cars. ... So I think they have been inspiring us."
Other traditional carmakers have been pushing ahead, too. Toyota Motor completed a prototype of an electric vehicle this spring, pushing out the model just three months after establishing its "EV Business Planning Department" in December. The rollout of the prototype took only half the time normally required to develop new models.
Toyota, the king of the hybrid market over the past decade, has been looking at hydrogen-based fuel-cell vehicles as the next big thing, not electric vehicles. Fuel-cell vehicles are considered the ultimate eco-car because they only emit water. But getting fuel-cell vehicles on the street is difficult as the infrastructure for hydrogen refueling stations remains largely undeveloped.
The increasing popularity of electric vehicles has forced Toyota to review its strategy. Announcing a capital alliance with Mazda Motor to develop electric vehicles together this summer, Toyota President Akio Toyoda said developing electric vehicles was a "battle in uncharted waters."
GM has launched its Bolt with a lithium-ion battery made by LG Chem, and Nissan recently rolled out a revamped version of its electric Leaf with a goal of selling 100,000 or so units a year. Tesla's Model 3, while experiencing production problems, has attracted strong interest, as demonstrated by its 500,000 preorders. "We think sales of these three models will be a true litmus test to determine whether the current boom will fizzle out or whether it marks the start of a full-fledged surge in demand for EVs," Goldman Sachs analysts wrote recently.
Goldman projects electric vehicle sales will reach 9.7 million units by 2030, or 8% of the market -- below more optimistic projections that reach as high as 20%. The investment bank forecasts that China and Western Europe will drive electric vehicle growth until 2025, when the two markets will account for 47% of all sales. China will reach a turning point on electric vehicles before the rest of the world, it says -- in large part due to subsidies and other government support for the market.
A key driver of electric vehicle demand in China right now is a policy in a number of major cities, including Beijing and Shanghai, that exempts them from license plate lotteries and registration fees. "These exemptions are critical levers to make purchasing an EV more attractive, especially for younger, first-time car buyers," according to a recent McKinsey report. "In all, China provides monetary subsidies that, for a representative, midsize car, amount to approximately 23% of total EV price."
China says it will begin to shift away from direct subsidies in 2020 to other incentives.
Time to change the batteries
Besides the question of how long the subsidies will last, the other factor that will determine how quickly the market takes off is the pace of advances in battery technology. According to Goldman, "In order for general consumers to take to EVs, a breakthrough is necessary to bring the cost down below $100 (per kilowatt-hour) as soon as possible," down from $272 in 2015. Many are hoping for a technological breakthrough to push prices down, such as a planned solid-state battery from Toyota that is expected to be launched in 2022.
Much of the attention has been on the Gigafactory, the battery plant in the Nevada desert in which Tesla and Panasonic have jointly invested $5 billion. The companies had planned to supply enough batteries for 500,000 cars a year by 2018, but the plant, which is only 30% completed, has already become a bottleneck for Tesla's growth. While the company had hoped to churn out 1,500 vehicles in September, the actual production volume for the three months ending in September was just 260.
Tesla's Model 3 is "deep in production hell," CEO Elon Musk said on Oct. 6. Panasonic's President Kazuhiro Tsuga acknowledged earlier this month that plans at the Gigafactory were not proceeding as well as hoped.
Meanwhile, Chinese battery makers have the Gigafactory squarely in their sights. CATL, China's fastest-growing battery maker, has pledged to produce more gigawatt-hours of batteries than the Gigafactory by 2020. The Ningde-based company's ambitious target jibes with Beijing's directive earlier this year that Chinese companies should double electric vehicle battery capacity by then.
Already, about 55% of global production of lithium-ion batteries, which are also used in PCs, mobile phones and other devices, is in China; Bloomberg New Energy Finance estimates that share will increase to 65% by 2021. Such an expansion would threaten the dominance of South Korean and Japanese battery manufacturers, including Panasonic, in a market that Goldman estimates will be worth $40 billion by 2025 -- and dominated by China.
"Electric vehicles are spreading much quicker than we expected," said one top Toyota executive. "Yet electric vehicles will not dominate the roads unless issues related to battery price, energy capacity and time-to-charge are solved."
Nikkei staff writer Kosei Fukao in Frankfurt contributed to this report.