Chinese Vehicle Market Slow to Turn Green

BEIJING – With the dust now settled from last month’s handover of power in Beijing, policymakers responsible for China’s auto sector seem to be favoring hybrids as a step toward expanding green-vehicle use.

The initial stage of the push to promote so-called new-energy vehicles, and with them a differentiated technology standard that China can export, now is widely acknowledged to have failed, at least regarding promoting sales of battery-electric vehicles.

Axel Krieger, analyst at management consultancy McKinsey’s office in Beijing, tells WardsAuto: “The frustration is that the policy is unclear, there are hardly any EVs to buy, the infrastructure is not there and there are disparate local solutions for local OEMs.”

Data from the China Association of Automobile Manufacturers (CAAM) shows only 12,791 new-energy vehicles were sold in China last year, the vast majority to government projects.

A little more than half were passenger vehicles (public buses accounting for most of the remainder), and these were spread across a range of domestic suppliers, with Chery’s QQ3 electric vehicle the top performer with 3,129 deliveries.

Industry sales primarily were EVs, but including a handful of hybrid-electric, plug-in hybrid-electric, solar, fuel cell, natural-gas hybrid and liquefied-petroleum-gas-fueled vehicles.

This is far from the government’s interim target of having 500,000 green vehicles on the roads by the end of 2015, let alone its projection for 5 million by 2020.

These frustrations were voiced by Beijing Automotive Group Chairman Xu Heyi, who told a press conference in mid-March that government sales accounted for almost all his state-owned company’s 2012 sales of 1,000 alternatively powered vehicles.

This is because of an underdeveloped recharging infrastructure: Beijing has just 47 EV charging stations, compared with 67 in Geely’s headquarters city of Hangzhou.

And while Industry Minister Miao Wei last month affirmed the government’s intention to continue encouraging green-vehicle sales though consumer and producer financial support for another three years, more flexibility is planned, including more subsidies for hybrids.

Notably, a new tier system will base subsidies not on vehicle type but on its energy-saving potential. One plan stipulates offering RMB3,000 ($483) per kilowatt-hour capacity of an auto battery, which can cover hybrids as well as EVs.

A 3-year trial program that expired in December provided a subsidy of RMB60,000 ($9,500) for the purchase of EVs and RMB50,000 ($8,060) for plug-in hybrids. Hybrid electrics were eligible to receive just RMB3,000, but the new subsidy framework removes the restrictive focus on EVs, to which the domestic industry so far has failed to respond.

“A shift is now taking place whereby the government is moving towards encouraging hybrid vehicles as a stepping stone to increasing the number of cleaner vehicles,” IHS Automotive analyst Namrita Chow says.

Industry-watchers say the central government’s promotion of hybrids could favor foreign auto makers and joint ventures, given their superior quality, reliability and warranty protection.

“I think global players like Toyota will benefit the most,” says Boni Sa, IHS Automotive’s China light-vehicle production manager. “Even if the government subsidizes hybrid vehicles in China, the hybrid cars will still be more expensive than the conventional models for both global and domestic” brands.

The FAW-Toyota JV is developing a hybrid version of the Corolla, Sales Manager Zhang Sijun says, and will increase investment in other hybrid models going forward. A BMW China spokesman confirms new-energy vehicles will be the focus of a forthcoming JV brand under the German auto maker’s existing arrangement with Brilliance Auto.

Another potential weakness in the revamped green-vehicle policy is the ability of local and city governments to have different policies, which might discourage the development of vehicles that are salable elsewhere in China or abroad.

Even as industry minister Miao was announcing the central government’s new subsidy program, officials in Tianjin, Shenzhen and Guangzhou were issuing details of their own, unrelated policies to stimulate local investment, prompting Yesheng Ji, deputy secretary-general of CAAM, to warn against such local protectionism.

“The pilot allows for multiple solutions to coexist. Different companies and local governments have different approaches – there’s no consistency,” says Bill Russo, a Booz & Co. senior advisor who cites BYD’s partnership with multinational ABB Group to develop charging infrastructure in Shenzhen as an example.

Wang Binggang, chief consultant to the Chinese government’s push to promote new-energy vehicles under the 11th Five-Year plan, wants the new subsidies extended throughout the green-vehicle chain, from auto makers to charging stations and upstream parts-replacement facilities.

Whether the new program adopts this kind of structured approach, even offering electricity tax concessions to users of EV charging stations, will go a long way toward determining its success, he says.

“The difficulty with reform in China is that the local regions can do a lot of stuff out of sight,” says Greg Anderson, principal at Pacific Rim Advisors. “They have been hammering on about auto industry consolidation, but that has not happened. There are new firms springing up all the time, because local governments are incentivized by economic growth.

“That’s how the (Chinese Communist) Party is built, and until those political and structural issues are taken care of, there is little chance of progress.”

Yet, Anderson also offers a note of cautious optimism. “(Premier) Li Keqiang is a trained economist – he gets this. There’s been a change at the top, there is the possibility of change, but we don’t know how effective it will be for years,” he tells WardsAuto.

Russo expects immediate progress in green-vehicle sales to public-transportation operators, including taxis. This could lead to more government vehicles going electric, although issues including public sanitation and postal service must be addressed before top officials abandon their premium black-tinted-window Audis.

Indeed, Anderson suggests: “People want to buy the most car they can that impresses their friends. It’s just not fashionable to drive a car that’s seen as environmentally friendly.”