China Inc.

Beijing’s drive to reduce oil import dependence and clean up its air has sparked a low-carbon transport revolution.

  • China imports about 8 million b/d of crude oil
  • China accounted for half of global EV sales last year
  • EVs offering China an opportunity to rebrand industry
  • Chinese manufacturers competing on technology

By almost any measure, China leads the world in road transport electri cation. It makes more, buys more and, with 75 different models available in 2017, offers consumers a wider choice of electric vehicle (EV) than any other country.

Chinese EV passenger car sales totaled 579,000 units last year. Add in about 20,000 imports and China accounted for around half of global EV sales. Chinese manufacturers also have a near total grip — about 90% — on the market for electric heavy-duty vehicles, selling 198,000 commercial EVs in 2017, about 85% of which were city buses.

The drivers of China’s EV boom are both political and economic, which guarantees continued state support. Industrial planners see a chance to change forever the country’s position in global auto manufacture and reduce growing dependence on imported crude.

China imported about 8 million b/d of crude oil in 2017. The conversion of even a portion of transport to run on electricity reduces the country’s massive oil import bill, improves its trade balance and reduces its vulnerability to external shocks in the oil market. The same logic applies to natural gas. China’s pipeline gas and LNG imports are rising fast. They are being used to switch from coal use in heating and power generation and other city gas uses. There is less emphasis on gas-for-transport than on EVs because, as with oil, China faces a growing import bill and security of supply concerns.

The focus on EVs creates a more circular economic chain, with domestic manufacturers and power generators benefitting rather than foreign oil and gas producers.

Moreover, China’s industrial base can bene t. Labor costs are rising, leading to the loss of manufacturing investment. Auto production is a high value-added industry as dependent on engineering skills and technology as much as labor cost. China needs to move up the manufacturing value chain, and an auto industry in transition to electricity and automation ts the bill. Electri cation and automation combined create a highly disruptive moment in the auto industry’s development, one which offers China an opportunity to re-write the established order in both domestic and foreign markets.

After a long period of rapid growth, China’s total vehicle market has reached a more mature phase as the stock of first-time buyers diminishes. It is characterized by slower sales growth, over-capacity and falling profi t margins. However, new energy vehicles (NEVs), which include battery-only EVs, plug-in hybrid EVs and fuel cell EVs, are a market within a market.

The segment is also dominated by domestic Chinese manufacturers, which have traditionally struggled to compete with foreign brands. NEVs represented just 2.7% of 28.9 million locally-produced vehicles sold in 2017, a small proportion, but sales were up 53% year on year. In contrast, China’s vehicle market overall grew by 3% over the same period.

NEVs also address the extremely high levels of urban air pollution in China’s major cities. While measures have been taken to curb coal- red generation in, or near urban areas, diesel and gasoline fumes from city traf c are a major contributor to poor air quality. At the same time, the greening of transport helps Beijing meet its commitments under the Paris Agreement on Climate Change. Being the market leader in NEVs builds on China’s rapid expansion of solar and wind generation to provide Beijing with a global leadership role on climate change.

The government has fostered NEV adoption by the provision of generous incentives, including sales subsidies of up to Yuan 55,000 ($8,590) for passenger EVs and reduced vehicle taxes. The sales incentive was reduced in 2017 and is expected to be phased out by 2020. This will be replaced from 2019 with a dual incentive scheme that imposes targets for NEV sales and average corporate fuel efficiency. In both areas, car makers earn tradable credits, while underperformers must buy credits.

Moreover, the credits are weighted according to vehicle quality in terms of range, a deliberate attempt to incentivize the development and deployment of better EV technology as China’s NEVs are generally smaller and perform less well than their Western competitors.

In Beijing and Shanghai, NEVs are also exempt from license plate auctions and registration fees. This is no mean giveaway: permanent license plates in Shanghai cost up to Yuan 80,000. In addition, more than 10,000 NEVs have been deployed in high mileage car sharing platforms. As a result, NEV penetration in China’s trend-setting tier 1 and 2 cities is much higher than elsewhere.

Subsidies are part of the government’s domestic industrial strategy. They are not evenly distributed and act as a barrier to foreign competition. ‘White lists’ are drawn up of eligible models by the Ministry of Industry and Information Technology, which heavily favor domestic manufacturers. There is also a list of approved domestic battery suppliers, from which Chinese NEV manufacturers source their batteries, although they are not speci cally required to do so.

This favoritism is backed by a long- term state-supported R&D effort. It is notable that BYD — one of China’s principal NEV makers — uses its own lithium iron-phosphate technology, rather than the lithium nickel cobalt aluminum-oxide batteries developed by Tesla Inc. BYD, which has already commercialized e-buses and e-trucks ahead of Tesla, says it will reduce battery cell costs by 50% to $110/kWh within three to ve years. In contrast, Tesla is targeting around $200/kWh when its Gigafactory ramps up to full production. BYD also claims to have equal, or superior, charging technologies as its more glamorous US rival.

But it is in e-HDVs where China’s lead is most impressive, both for domestic use and export. These include the manufacture of refuse trucks, light trucks and city buses for relatively short range, stop/start transportation tasks. Here, China dominates global production. E-buses, in particular, displace more fossil fuel than light-duty passenger EVs and remove more diesel fumes from city streets. As a result, the impact of EVs on oil demand is likely to be felt rst and foremost in the Chinese diesel market.

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