Electric Cars: The Future of Chinese Transportation?

As the world’s fastest growing automobile market, China can potentially be the largest market for zero-emission cars. These last two years, we’ve already seen a nationwide push to increase the number of electric cars on the road. Armed with a mighty bankroll, the central government has taken into account the hefty price-tag for electric cars, and has come to offer subsidies for large-scale purchases of electric vehicles. Taxi companies, local governments, and other institutions can receive subsidies of up to $8,800 per electric car. The goal is to have half a million hybrids or electric cars by the end of 2011, far surpassing North America’s 267,000.

Hangzhou

Hangzhou is one of the cities the central government has chosen to lead the charge in greener traffic. Various policies have been enacted to this end. $14.6 million has gone into expanding the number of electric cars on the road. Electricity prices for recharging cars has been lowered. Parking spots have even been designated as “electric vehicle only.” Similar initiatives are being seen in 13 other cities. China Daily reports that Beijing authorities have rolled out a bold plan to start running thousands of electric vehicles later this year. In order to sustain this plan, the chairman of North China Grid stated that up to 450 recharge stations were planned for the influx of electric cars in the capital. Expect to see these initiatives spread to other cities in coming years.

(Photo Credit: 赛安德)

BYD, Co.

Yet China’s ambition certainly goes far beyond filling its streets with electric cars. It also aspires to be the global industry leader in their production. And from the looks of it, that may not be too far off. Having come to terms with its general disadvantage in traditional internal-combustion cars, and accepting pollution as a serious threat to sustainable development, the CCP understands it is in its best interest to pursue alternative energies for transportation. Consequently, the CCP has committed to pledging $1.5 billion in grants to help China’s auto industry innovate.

It’s therefore little surprise that Chinese companies are making large strides in such technologies. A shining example being BYD, Co. The Chinese battery and auto-maker has been dominating local headlines for years, and is fast becoming known to the rest of the world. For one, celebrity businessman Warren Buffett bought a 10% stake in the company for $230 million in December 2008, stating he believed they could become the world’s largest auto-maker by making electric cars. Later in May 2009, BYD signed a contract with the world’s largest automaker, Volkswagen, to cooperate over hybrid cars and lithium-battery powered vehicles. Then just a couple weeks ago, BYD and Daimler Ag, the world’s second largest producer of luxury cars, signed an agreement to enter a “comprehensive technology partnership” in order to develop electric vehicles for sale in the Chinese market. There’s also talk of BYD exporting electric cars to Europe and the U.S. by 2011, which doesn’t seem a long-shot for a company with 11,000 engineers and technicians working to advance their battery technology. They’re now the fastest growing Chinese automaker. Not bad for an 8 year old company.

(BYD’s e6 – one of the models to be introduced to Europe)

BYD shows promise, but it’s just one of many such Chinese companies.

Advantages

Much of China’s competitive advantage in this industry comes out of the CCP’s deep coffers and undisputed efficiency in enacting policy. Having identified electric cars as a corner stone for China’s auto industry the central government is willing to invest a small fortune to modernize it. Meanwhile many foreign auto-makers deal with a laundry-list of problems.

Electric cars may also be an easier sell for Chinese consumers. The local auto-market is still relatively young, which could potentially translate into Chinese car-buyers being less attached to gas-powered cars compared to Americans and Europeans. Analysts also cite China’s traffic as more suitable for electric cars due to its predominantly urban, short-journey nature. Since electric cars are limited to 100 – 200 kilometers per charge, they are a less tempting option for North-American drivers who tend to travel longer distances.

Our research also indicates Chinese consumers are growing increasingly weary of environmental issues such as pollution.* Those who have traveled or lived in Chinese cities can understand just how bad the pollution is. There’s no ignoring it. It’s a tangible, everyday part of a Chinese urban resident’s life. A constant reminder that something has to change. If electric cars are positioned as an integral part of cleaning up cities, people have even more incentive to invest in one.

Barriers

But just as in any auto-market, there are significant barriers for electric cars. First and foremost, price is a serious concern for the Chinese consumer. Electric cars still cost about 30% more than gas-powered. This is mostly due to the battery, which alone costs RMB 60,000 (about $9,000). Fortunately, as electric car sales increase, and production cost for batteries decrease,battery prices will go down.

Another barrier is the newness of this technology. Battery technology still needs to improve. Battery life is short, which means range of transportation is equally short.

Electric cars require additional infrastructure. Beijing is set to build many recharge stations, but this needs to be implemented nationwide before people can seriously consider buying an electric car.

Chinese Youth

So how do Chinese Youth feel about electric cars? They are, after all, the world’s biggest potential market for these cars. Many of those we’ve spoken to have expressed an interest in electric cars, but are still weary of making the switch. They are well aware of the long term savings an electric car offers (100 km on RMB 5, versus RMB 50 with petrol), but the hefty price tag is still very much an issue.

The Chinese youth we have spoken to unanimously acknowledged electric cars as the “vehicle of tomorrow.” But therein lies a problem: “the vehicle of tomorrow.” Chinese youth don’t think electric cars are worth buying today. Companies like BYD may find it difficult to convince the emerging consumer they should invest in electric cars now.

We’ve also heard young male consumers express concern that electric cars lag behind gas-powered in terms of speed. Electric cars lack the thrill associated  with faster, gas-powered cars. Performance aside, this demographic also expressed dissatisfaction with the design of electric cars. For the young, first-time car buyer, getting a car is a momentous occasion. Many aspire to luxury or speedier sports models.

The thrill seeking consumer and the electric car may be mismatched, but we’ve heard from an entirely different segment of youth consumers, who place environmental concerns far higher than speed or looks. Some have made it clear they want these cars and their necessary infrastructure to prevail nationwide as soon as possible.

As this industry matures, it seems electric cars are set to revolutionize China’s urban traffic. Moreover, we’re seeing a drastic shift as China’s domestic auto industry seems poised to influence international automakers.

* For more on Chinese youth and green values, get the joint enovate & Greenovate report.