Creating An Electric Vehicle Industry: Not an Easy Task

Tim Dunne, J D Power

Over the past several years, international media have been reporting with increasing frequency about China's intention to lead the world in the development of hybrid vehicles and electric vehicles (EVs).

Two years ago this month, for example, a headline in the global business section of the New York Times proclaimed: "China Vies to Be World Leader in Electric Cars", and reported that China's auto industry policymakers want to position China as one of the world's leading producers of green vehicles "within the next three years."

Since we are at the beginning of year three of China's green vehicle campaign, now might be a good time to assess how much progress has been made.

The short answer is, unfortunately, not much.

Since sales volumes of hybrid and EVs in China are so small, they are not widely reported, so it's difficult to say with certainty what the exact sales totals are.

However, based on the limited amount of published data available, and anecdotal evidence from automakers and industry experts, sales volumes of hybrids and EVs are small.

Total sales of hybrid vehicles in China in 2010 were estimated to be in the thousands of units. By comparison, hundreds of thousands of hybrids were sold in Japan, the United States, and Europe. Then, if one considers only the number of EVs sold in China in 2010, the sales figures are believed to be even smaller than hybrids.

So what happened? The blame for the slow start to China's electric industry does not lie within China's auto sector or at the doorstep of the country's policymakers. Certainly, both groups are committed to making an EV solution work for China. Plans have been made, billions of RMB has been set aside to support the industry, and incentives have been provided to encourage automakers to build the vehicles, and for consumers to buy them.

Instead, the problem with EVs is tackling a technology that engineers have been trying —and mostly failing - to make more cost-efficient, convenient, and appealing to consumers for the last 100 years or so.

The drawbacks to electric vehicles are manifold, and have been recounted endlessly in numerous studies. EVs lack driving range, require long recharging times, and often feature performance compromises (e.g inability to hold a charge in cold climates, or a lack of power over mountains/ hilly terrain, or when towing). Moreover, there is a substantial lack of infrastructure to support widespread EV recharging.

While all these concerns are important, they are not the most important reason that buyers are avoiding green vehicles. Based on J D Power research of new vehicle buyers in China - and in major markets around the world— while many consumers are intrigued by the idea of owning an EV, they balk when they learn about the price premium associated with these vehicles.

In China (and other markets), the retail price of an EV can be double that of a similarly sized conventional vehicle. This price premium is usually met with significant resistance by consumers. Even with government-provided subsidies, credits, rebates, or other types of incentives, EVs can typically cost 25-50% more than their conventional vehicle counterparts.

The path forward for growing an EV industry is not likely to be easy, but pursuit of an electric future is almost mandatory. A report by the International Monetary Fund, issued in April, warned that dwindling global oil supplies should drive oil prices upward as demand increases—especially in countries like China, where oil demand is soaring, and annual vehicle sales are expected to double in the next decade.

China, today, is the second largest consumer of oil in the world, after the United States. In 2010, China's imports of crude oil accounted for a little more than half of the country's total oil consumption, government experts say. Importing more than 50 per cent of annual oil consumption is generally recognized by oil industry experts as an energy security issue.

The concern doesn't end there. In 2010, the International Energy Agency estimated that growth in China's oil demand was increasing at a rate 8 times faster than global supply growth. According to industry analysts, at the current rate of demand growth, nearly two-thirds of the oil consumed in China will have to be imported by 2020.

Since it is estimated that 60 per cent of oil consumed in China today is used to power the national vehicle fleet, it is only natural to look for an alternative. That alternative is electric vehicles.

However, even if breakthroughs in EV technology can be achieved—to give them greater range, faster recharge times, and better performance in suboptimal operating conditions—and even if EV prices come down substantially to make them more attractive to consumers, the challenges do not end there.

Electricity would need to be produced in sufficient volume to power a growing national fleet of EVs, and that electricity is created at powerplants usually fired by coal. China controls the world's largest reserves of coal, so access to coal resources is not an issue.

However, burning greater amounts of coal could create emissions that equal or exceed the emissions released by conventional internal combustion engines, causing harm to the environment.

Earlier this month, the Innovation Center for Energy and Transportation, a Beijing-based policy center, announced that it had been working on a report entitled, "Electric Vehicles in the Context of Sustainable Development in China." The results of the report "may surprise many", according to its authors.

In short, the report found that EVs are not always an environmentally friendlier alternative to conventional vehicles - particularly in the case of greenhouse gas emissions—because of the quantity of emissions created at the powerplants that produce the electricity needed to power EVs.

Certainly, there are cleaner technology alternatives to coal-fired powerplants for producing electricity. Some options include wind, solar and nuclear power. But each of these comes with its own challenges.

While many questions remain about the viability of EVs as a clean and sustainable successor to conventional vehicles, one point does seem clear: Creating an electric vehicle industry will not be an easy task.

China's Vehicle Market

April Flat: A Signal of Slow Growth Ahead?

China's vehicle market has been accelerating for the last two years, with growth hitting double digit figures. While it slid back to single digits in February and March, the 10% growth in Q1 still looked good. However, sales in April proved disappointing.

 
 
A total of 1.46 million light vehicles were registered in April, just 2% higher than a year ago. Passenger vehicle demand improved 7% year-on-year to 1.0 million units, while light commercial vehicle demand declined 9% year-on-year to 442,000 units. Production of light vehicles turned negative to -1%, following 26 consecutive months of growth since February 2009.

The Japanese earthquake and the subsequent shortage of imported parts hindered production. Some OEMs were able to maintain output in March but others had to cut volumes in April. Japanese parts suppliers are not expected to resume production any time soon.

Sales of Toyota and Honda vehicles dropped more than 20% y-o-y in April. Nissan's total sales were the same as they were a year ago, but its production was down 36% year-on-year. Mazda and Ford also suffered output cuts, as they rely on imported Japanese parts.

 
Those who were not affected by the Japanese earthquake took the opportunity to raise their market share. Volkswagen, Hyundai and Kia all recorded double-digit growth in April. They not only had strong inventory to meet demand but also launched new models including the Passat NMS, Sonata YF and K5.

 
Apart from the earthquake impact, the rising fuel price due to the Middle East unrest and weakening US dollar also raised concerns over the economy, resulting in slower spending.

This was reflected by the sluggish performance in segments such as midsized car, MPVs and light trucks that are more sensitive to the fuel price than the others

Sales of the mini buses and mini trucks continued to shrink. Without the presence of subsides which supported demand in the past two years, these two LCV segments faced an uphill drive.

Some of the models were in short supply, yet the average vehicle price in the market continued to fall in April; 0.2% lower than March and 3.5% lower than a year ago. Price-cuts spread throughout the country due to the high inventory at the dealers, which was over 2.5 months on average. The poor sales numbers in April may well drive some OEMs such as Shanghai GM, BYD and SAIC to cut prices and help take some pressure off the dealers.

It makes one wonder whether China, the world's biggest car market, is set for slower growth ahead. The fast expansion in the last two years may have been demand pulled forward.

 
While, we have recently revised downward our forecast for 2011 from 11% to 7%, we are still optimistic about the market. Massive road construction, a fast rate of urbanization (over 10 million people move to cities every year) and an increasing family income are all a foundation for rapid vehicle demand growth in China during the next decade.