Electric cars are the future we’ve all been waiting for. Oh wait. Maybe they’re a sub-optimal solution to our transport needs that has failed in the past and is doomed to fail again. It all depends on who you ask.
Welcome to our field guide on China’s electric-vehicle industry. Check out other parts of our deep dive here.
In the “I can’t wait to own an electric car” camp are those who point out that electric cars are simpler to build, easier to maintain and, thanks to modern computing, have lightning-quick responses to driver controls, like steering and braking. They are also quiet, don’t spew nasty pollution into the air, and, in a world threatened by catastrophic climate change, offer one of the most promising sustainable alternatives to the fossil-fuel vehicles we are all addicted to. Moreover, in a future of autonomous driving, shared ownership, and cheap green energy, electric cars are likely to be the most economical option, too.
Those in the “oh, please, give me a break” camp point out that batteries still can’t compete with gasoline on driving range, charging stations are hard to find, charge times are much longer than a stop at the gas station, and electric cars cost more. At the same time, gas-dependent cars have improved a lot, too. They are far more efficient, quiet, and easier to drive. Most importantly, they are supported by an existing infrastructure that includes hundreds of thousands of gas stations and decades-long industry experience.
But there are convincing signs that the era of the electric car is upon us. You might think we’re referring to Tesla, and the huge amount of attention paid to its Model 3 car, and colorful leader, Elon Musk. Wrong. If you want to understand the disruption that’s underway in cars, you need to look to China.
This dreamed-up future of electric cars once existed in the past. In 1900, more than a third of all cars on the road were electric. They were the preferred vehicle in cities: accessing electricity was relatively easy and people were only taking short trips. Their hot, noisy, fume-spewing cousins were for the countryside and traveling between cities, when driving range mattered more than comfort. All that changed after the invention of the electric starter, which made it much easier to get your gas-fueled car going. (Before that people had to use a hand crank.) Add in improved design and comfort and the cost-cutting made possible by Henry Ford’s assembly line, and we bid goodbye to the electric car.
It’s all about China
The Chinese government—both central and local—has invested nearly $60 billion in the last decade to develop both a domestic electric-car industry and a market for all those vehicles it’s making. This year, the country is expected to sell more than one million electric vehicles (EVs), nearly as many as the rest of the world combined. What’s more, the government plans to keep on spending—another $50 billion over the next decade to firm up its domestic auto industry.
China’s gamble on electric vehicles makes sense when you look at the potential payoff: cleaner air, less reliance on imported oil, and the transformation of its auto industry from a technology follower to a technology leader. A future prize for its efforts? A big chunk of the global auto industry’s $2 trillion in annual revenues.
It’s not a blind bet either. China leapfrogged the world in solar technology, capturing the pole position from Germany in the mid-2000s. To accomplish that, the country’s government pumped many billions of dollars’ worth of subsidies into the industry, creating hundreds of companies that successively made the production of solar panels cheaper. And then, to make the industry more efficient, the government picked out the best companies to scale up the technology.
The result is that China now produces 60% of the world’s solar panels, according to the International Energy Agency. Though government subsidies still create small boom and bust cycles in the solar market, experts believe the government has likely done enough to let the solar industry stand on its own feet. Now China wants to do the same with batteries and electric vehicles.
No other country in the world has anywhere near the same potential payoff for EV ubiquity, and accordingly, no other country has quite the same ambition. That doesn’t mean other countries aren’t trying.
Here’s who else is in the race
The European Union can legitimately claim to be the world’s environmental leader. It has laid out clear and ambitious climate policies, and as a whole has been remarkably successful. But transport is one of the few sectors where emissions are still on the rise. Moreover, without a coherent EU-wide zero-emissions policy, it still trails China as a market for EVs. Last year, the EU created the European Battery Alliance in a bid to support the development of its own EV industry. This year, Germany promised up to €1 billion in grants to build a battery-cell production facility on the continent. What’s certain is that the number of EVs sold in Europe will continue to grow and perhaps rapidly. What’s in doubt is whether Europe can catch up with China.
The US has a long history of investing in research and development. Add in the entrepreneurial zeal of Silicon Valley, and it’s no surprise it’s the world’s technology leader. But the US government no longer offers the kinds of grand vision statements on technology it made during the cold war, leaving it to California to get the country excited about EVs. The state has mandated that a small portion of large carmakers’ sales have to be zero-emissions vehicles (ZEVs) and it created a credit system to let companies trade any extra value they create by making more ZEVs than required. That’s why California has seen the most electric-car startups take off, including Tesla, and why it’s the US’s largest electric-car market.
At the federal level, direct subsidies are offered for the first 200,000 electric cars sold by a manufacturer, and that’s helped. But unless they’re extended, subsidies will soon run out for Tesla and General Motors, and it’s not clear what happens after that. With the US exporting more oil than it is importing, there are now fewer incentives to keep supporting the tech.
Norway beats the world, if you’re talking about which country has the most electric cars per person. (It also has the most Tesla cars per capita.) Norway got rich selling oil. But the country also recognizes the challenge of climate change and the inevitable end of a finite resource, so it has used some of its oil revenues to fund subsidies for electric cars. It provides a slew of benefits for electric car buyers: no import tax, no sales tax, no vehicle-registration fees, free access to toll roads, and free parking in some city areas. The upshot: nearly 40% of cars sold in 2017 were battery-powered or hybrids.
Japan’s auto industry created market leaders in two types of EVs: the Toyota Prius (a hybrid that uses a small battery to increase its mileage) and the Nissan Leaf (a battery-powered electric car). It also leads the world in charging infrastructure, with 20% of its fast-charging stations. All that infrastructure hasn’t significantly boosted EV sales, however: They make up only 1% of all car sales. But Japan does have ambition. Its government wants all new passenger cars to be either electric or hybrid by 2050.
Fun fact: Japan is home to the world’s largest fleet of hydrogen-powered fuel-cell electric vehicles (FCEVs). In a world of zero-emissions vehicles, FCEVs are the only real competitor to a battery-powered electric car.
MATTERS OF DEFINITION
Electric cars come in different flavors: from hybrids (Toyota Prius) to fully electric (Tesla Model S). Though the goal is to ultimately eliminate gasoline-powered cars altogether, we will see a mix of power sources in our vehicles for some decades to come. Keep these definitions handy to understand the differences:
Battery-powered electric vehicle (BEV): The only source of energy is a battery, which runs an electric drivetrain. Tesla, for example, only makes BEVs. About 40% of the cost of a BEV is estimated to be the battery. Technically, this is the simplest type of EV to make but, because batteries are still quite expensive, almost always the costliest option.
Range-extended electric vehicle (REV): An electric car with a smaller battery than those in BEVs. The battery is connected to an auxiliary power unit (APU), and when the battery starts running out of juice, the APU kicks in to burn fossil fuels and charge the battery. The all-electric black cabs now in use in London are REVs.
Plug-in hybrid electric vehicle (PHEV): Essentially a car with two types of fuel: electrons and gasoline. PHEVs have a mid-sized battery, which in many cases, will last for a typical city commute without recharging. When you need to travel farther than the battery can take you, the internal-combustion engine kicks in for those extra miles. The recently retired Chevrolet Volt was a PHEV.
Hybrid electric vehicle (HEV): Like PHEVs, these run both modes: electric and internal combustion. But their batteries are so small that they don’t need to be charged using an external supply. Instead, they are charged through regenerative braking and deceleration. HEVs can run in all-electric mode during the most gasoline-consuming bits of driving: start and initial acceleration. That gives them much better gas mileage than their purely fossil-fuel cousins, while not costing as much as other types of electric cars. It’s one reason why the HEV version of the Toyota Prius is one of the most popular cars among Uber and Lyft drivers.
Mild hybrid electric vehicle (MHEV): Like HEVs but with an even smaller battery that can only run a few parts of the drive cycle in all-electric mode. MHEVs turn off when idle, and kick back in instantly when acceleration is needed, like when you come to a red light or stop sign. MHEVs sport higher mileage compared to gasoline-powered vehicles but lower than HEVs or PHEVs. Some industry experts believe that, in the near future, all gasoline cars will be MHEVs, because the small upgrade more than pays off in lower fuel costs.
The world’s most populous country had very few cars on its roads as recently as 1980. In that year, China produced just 5,000 passenger cars, compared to the 6.7 million made in the US. When Deng Xiaoping, its former leader, started opening China’s economy to the rest of the world, he invited foreign auto companies to team up with state-owned manufacturers and teach them how to make world-class cars. (He dangled access to China’s vast untapped market in return.) These domestic-foreign partnerships, starting with Volkswagen and Peugeot, helped kickstart growth in China’s car-production capabilities.
But even then, passenger cars were still considered luxury products in China, and typically only affordable for government officials and businesses. A Volkswagen Santana, for example, cost 200,000 yuan in the 1990s, while the country’s average annual salary was around 10% of that.
Car-free roads didn’t last much longer though. As reforms took hold and China’s middle class grew in size, millions of people were able to afford their own car.
Note to readers: Many of the links in this article lead to sources written in Chinese.
In 2009, China produced 13.8 million vehicles and sold 13.6 million, surpassing the US to become the world’s largest passenger-car producer and market in the world. And that became a problem. While it helped China develop economically, it ruined the air of its many big cities.
Internal-combustion engines fueled by petroleum are a major source of a type of air pollutant known as fine particulate matter, or PM2.5 (indicating each particle has a diameter of less than 2.5 micrometers). They are so small that they can enter the body’s bloodstream, through the lungs.
Exposure to PM2.5 has a range of detrimental effects on hearts, lungs, and brains. Its worst effects are on kids and even unborn children inside the womb. The United Nations estimates that PM2.5 exposure was responsible for 4.2 million deaths in 2015. Reducing PM2.5 pollution can have the same health impact as eradicating breast and lung cancer around the world.
In 2012, China officially began to include PM2.5 in its air-quality monitoring, and soon realized just how bad the problem was. In 2013, China’s prime minister Li Keqiang publicly declared “war against pollution” and promised to “fight it with the same determination we battled poverty.”
This was a big deal: Li’s public statement broke Beijing’s long-standing policy to prioritize economic advancement over everything. The government put its money where its mouth was, immediately instituting license-plate restrictions on fossil-fuel cars in big cities like Beijing, Guangzhou, and Shenzhen. It now controls the number of new cars added to the roads of large cities each year by limiting the number of license plates issued. If you want a license plate for a diesel or petrol car, you need to enter a lottery system; for new-energy vehicles (NEVs), which are fully or partially electric cars, it’s first-come-first-serve.
That makes a major difference in people’s car-buying decisions. In Beijing, for example, the chance of getting a new license plate for a fossil-fuel car is now just 0.2%. Not many people are willing to bet on such long odds. As of today, the license control system is in place in 19 cities, and electric vehicles registered in these cities account for over 95% of all those sold in the country.
Nationwide, total NEV sales have shot up from 1,000 in 2007 to 770,000 in 2017. But that was still only 2.7% of the country’s total auto sales, and China’s pollution problem hasn’t gone away.
Beijing is now in desperate need of solutions to mitigate the threat pollution poses to its economic and technological development, not to mention the health of its citizens—a 2017 study showed that air pollution is shortening the average Chinese lifespan by as much as three years. In particularly bad months, thousands of people are hospitalized because of the vile air.
So Beijing is betting big on cleaner vehicles: it wants 20% of China’s total car sales to be NEVs by 2025. At the same time, the country is also building a vast network of charging stations. While a majority of charging will happen at home or in depots, studies have shown that easier access to public charging stations is vital to EV adoption.
Subsidies got China where it is today when it comes to electric vehicles. But the government thinks it needs something else to push the country to the next level. So it’s rolling back the subsidies, and instead instituting a market framework that somewhat resembles emissions cap-and-trade systems: All carmakers will be required to meet NEV production quotas. Those that make more than the minimum number of EVs will earn credits, which they can then sell to competitors who don’t satisfy the quotas.
Some experts Quartz spoke to said that, too often, China’s market-oriented policies don’t work. Companies find it easier to adopt the cap as a mandate and forget about the trade part. But if this time around the policy succeeds, China’s strategy might become the playbook for other countries seeking to enter the electric future. If it fails, the pressures of climate change aren’t going to go away, and countries will be forced to devise alternatives.
CAST OF CHARACTERS
China’s Big Five
There are currently 393 companies that make electric vehicles or electric-vehicle parts in China. According to a Quartz analysis, at least 55 of them have licenses to assemble and sell passenger cars under their own name or for other brands. Even with an aggressive increase in the number of electric cars sold in the country, that’s a lot of EV makers.
But that’s what you’d expect when the central government declares that electric vehicles are a “strategic” industry and gives away generous subsidies. After 10 years of government incentives, it’s starting to become clear which kinds of companies will dominate in China and compete with the likes of Tesla, Volkswagen, or Toyota. Here are some of the biggest, to give you a sense of the landscape:
Founded in 2009, BJEV (Beijing Electric Vehicle) is a subsidiary of state-owned BAIC (Beijing Automotive Industry Holding Company). It’s by far the biggest manufacturer of BEVs in China. The company’s most popular cars are its EC series, which, thanks to government subsidies, can often sell for as little as 50,000 yuan ($7,300). When the subsidies go away, prices will inevitably go up.
Electric vehicles still take forever to charge, making long-distance travel a pain. But BJEV has a plan: battery-swapping. Stopping at a battery-swapping station takes even less time than refilling at a gas station. The company says it has learned from past failures. For example, the startup Better Place raised $1 billion to build a network of battery-swapping stations and then went bankrupt in 2014; Tesla abandoned its own battery-swapping plan a year later.
BJEV thinks the other players came to the game too early. Currently, the company has some 100 battery-swapping stations across China (34 are operating in Beijing), and wants to build 3,000 of them by the end of 2022. That would be enough for 500,000 electric cars. BJEV is currently trying to sell taxi companies (and other organizations that require large fleets of cars) its battery-swapping tech. It is also determined to go global, starting with the Middle East, followed by Southeast Asia and South America, according to Wang Chunfeng, a marketing director for the company’s overseas market.
By the digits
- 2017 revenue: 11.5 billion yuan ($1.7 billion)
- Market cap: approx. $4.5 billion
- Sold since founded: 240,000 all-electric passenger cars
BYD began its life as a phone-battery maker in the 1990s, and has since become the world’s largest manufacturer of electric vehicles, including BEVs and PHEVs. The Shenzhen-based company won huge contracts to make batteries for Motorola and Nokia, and had a successful 2002 IPO on the Hong Kong stock exchange. Flushed with cash, it acquired a state-owned automaker that was on the verge of bankruptcy.
Its pivot to cars was hugely successful; BYD’s gas-powered models soon became some of China’s most popular passenger cars. In 2008, BYD beat much bigger names to launch the world’s first mass-produced plug-in hybrid. That same year, Warren Buffett acquired a 10% stake in the company. BYD has kept expanding: In the last 10 years, the company has built many new models of electric cars, and started manufacturing solar panels, home energy-storage systems, and even monorail transport systems for cities.
By the digits
- 2017 net profit: $4.1 billion
- Market cap: approx. $22 billion
- One-year return: -11.79%
Zotye began as a car-parts manufacturer in the early 2000s. These days, it has focused primarily on two types of cars: two-seater electrics, like its popular E20 model, and diesel cars. Zotye sold about 36,000 BEVs in 2017, placing it third in China behind BJEV and BYD. But really, it’s growth bet is on diesel; it produced six times as many diesel cars as BEVs in 2017, and though the company has no plans to sell EVs internationally, it is hoping to bring its diesel SUVs to the US as soon as 2020 according to a company spokesperson. Weirdly, Zotye also makes furniture—which accounted for around 1% of its 2017 revenue.
By the digits
- 2017 net profit: 1,136.3 million yuan ($166.2 million)
- Market cap: approx. 9.95 billion yuan ($1.4 billion)
- One-year return: -57.65%
Xiaopeng Motors is one of the hottest Chinese EV startups. It was founded in 2014 by He Xiaopeng. As a 27-year-old, He developed the UC Browser, popular on smartphones, and then in 2014, sold it to e-commerce giant, Alibaba, which backed his move into EVs. He owns four Tesla cars and said the California-based carmaker was one of the inspirations to start his own car company.
Valued at $3.6 billion, Xiaopeng doesn’t even have its own manufacturing capabilities yet—but plans to build one soon. For now, it has outsourced production to Haima, a state-owned company, and has yet to deliver a single vehicle. Xiaopeng’s flagship car is the G3, an all-electric compact SUV, which made its debut at the Las Vegas Consumer Electronics Show in January 2018. Xiaopeng gave the first 100 or so G3s it manufactured to employees and friends, saying its plan was to learn from having cars in users’ hands before selling them to the public. Its latest target is to deliver at least 1,000 cars by February 2019, a deadline that has slipped by a couple of months.
The EV-startup space is becoming competitive. NIO, another EV startup, was listed on Nasdaq earlier this year and is valued at $7 billion. It is on track to deliver 10,000 cars this year—nearly as many as Tesla is projected to sell in China in 2018. The next two years will be crucial for EV startups. Xiaopeng has relied on government subsidies, as much as 80,000 yuan ($11,000) on each car, to keep prices low enough to appeal to customers. It will now have to lower costs while also scaling up—a tall order for a company that’s yet to actually sell a vehicle.
By the digits
- Valuation: $3.6 billion
- Sold since founded: 0 cars
- Car models in the works: 2 (in addition to the G3)
Founded in 1993, Yutong Bus started by selling gas-powered vehicles. But early on, Yutong saw the age of cleaner transport coming: In 1999, it made its first all-electric bus, and in 2005 came out with its first hybrid. Yutong began to scale up just in time to take advantage of a government subsidy program for EV buses, launched in 2009. (It also didn’t hurt that Yutong’s chair, Tang Yuxiang, happened to be a member of the National People’s Congress, China’s national legislature, where he was able to push new rules to raise subsidies for new-energy buses, and reduce subsidies for buses running on gas and diesel, in 2014).
Today, Yutong is the world’s largest manufacturer of electric buses. As the subsidies that have served it so well dissipate, Yutong is looking to exports to plug the gap. It expects demand for its electric buses to rise in Europe—but not in the US. “China and the US don’t have a very good relationship. We would like to go to the markets that are friendly to China,” Tang told Bloomberg in 2017.
By the digits
- 2017 net profit: 3.129 billion yuan ($458 million)
- Market cap: approx. 26 billion yuan ($3.8 billion)
- One-year return: -47.56%
CHINA’S NEXT STEPS
Capturing the supply chain
For all the advantages of an electric car, they are still too expensive. Elon Musk’s big bet is that the Tesla Model 3—priced at $35,000 without subsidies—will be the first mass-market electric car. That makes sense in the US, where the average price of a car is about $34,000, or even in Europe, where the average is closer to $30,000. It won’t work in China where the average cost is less than $20,000.
One sure way to make electric cars cheaper is to lower the cost of the lithium-ion battery, which can make up as much as 40% of an EV’s price, according to Tobias Schmidt, a researcher at ETH Zurich. No country in the world has understood that better than China.
The government’s subsidies haven’t just supported EV makers but also battery makers. China already leads the world in battery production, and by 2021, its capacity is expected to increase fourfold, according to Bloomberg New Energy Finance.
To do that, it will also need access to the four components that make lithium-ion batteries: anode, cathode, separator, and electrolyte. China currently controls between 50% and 77% of the global market for the raw materials of these components, according to Yano Research Institute.
Lithium and cobalt are two critical elements which have seen price volatility in global-commodities markets over the last three years. Chinese companies effectively control or own 35% of the world’s cobalt mines and 50% of lithium mines. Many of these companies own are state-owned, a position which some global automakers worry Beijing could use to squeeze them out. That’s why BMW and Tesla have been reportedly making their own deals with mining companies to lock down supply.
In 2010, China flexed its global monopoly of rare-earth metals—used in electronics, for example—to threaten Japan over a geopolitical issue. At the time, China produced 95% of these elements. Japan had recently detained a Chinese boat captain after his boat collided with a Japanese coast guard vessel, and in retaliation, China stopped exporting the metals to Japan. That led to a spike in price on global-commodities markets for those metals, and prices didn’t come down for months even after China lifted the export ban.
Three things standing in the way of China’s EV global domination
Car glut: How many of China’s 400 or so EV manufacturers can the market realistically support? A recent report from Scott Kennedy at the Center for Strategic and International Studies, a US think tank, mocked many of the new Chinese EV startups as “powerpoint manufacturers,” because many still don’t have their own manufacturing facilities. Their prospects of survival are dire.
Shen Haiyin, CEO of Singulato, a four-year-old EV startup valued at $1 billion, predicts that only 10% of today’s EV startups will survive the next five years. Xu Heyi, chairman of BAIC Group, which owns China’s largest battery-powered electric car seller, BJEV, echoed Shen’s opinion in June when he predicted that at least a third of China’s vehicle makers will be out of the game by some point between 2020 and 2022. Analysts agree: “A lot of capital is being invested in this industry. A lot of it will be wasted,” Paul Gong, an analyst at UBS, told the Wall Street Journal.
Quality control: Survival is also a challenge for those companies developing a reputation for cutting corners. WM Motor, a three-year-old startup valued at $2.5 billion, had one of its test SUV spontaneously combust in June this year. WM Motor said it happened because a staffer had violated safety regulations by charging the vehicle at the end of its life and blamed the fire on the battery maker.
Despite the domestic success of China’s carmakers, they’ve struggled to compete internationally, largely because of widespread perceptions of poor quality. Even Chinese car buyers don’t fully trust Chinese brands: the three most popular passenger-car brands sold in China are Volkswagen, Nissan, and Toyota. China’s home-grown EV makers need to go above and beyond to prove they’re safe if they want to thrive into the 2020s.
They will face further pressure following a government decision to phase out restrictions on foreign ownership in the auto industry. This has, for example, enabled Tesla to commit to building its Gigafactory 3 near Shanghai, where it hopes to begin production in 2019.
IP theft: Companies like BYD and BJEV have another major PR problem to overcome: For a long time, the country has been known as the world’s copycat and it hasn’t been shy about it.
It’s most obvious in consumer electronics. In Shenzhen, China’s electronics hub, where many international brands use local manufacturers to design and make parts for their products, you can now buy “aPods” and “Noklas” that essentially have the same core components as real Apple iPods and Nokia smartphones.
The problems are particularly acute in highly-competitive industries, like EVs. For example, earlier this year, after Xiaopeng hired an ex-Apple engineer, their new employee was arrested by the FBI on his way out of the US, and charged with stealing secrets from his previous company. In a public statement in July, Xiaopeng said its engineer had never disclosed any “sensitive information or violation” to the firm. The engineer is no longer on staff, according to a Xiaopeng spokesperson. In the US, the engineer has been charged with theft of trade secrets, and the next hearing in the case is planned for Dec. 17.
China isn’t idly standing by: In 2014, the government began establishing courts specifically to focus on IP cases in big cities like Beijing and Guangzhou, and it is now in the process of increasing the ceiling for punitive damages in patent cases, as a copycat deterrent. For six straight years, China has risen on the US Chamber of Commerce’s “International IP Index” (PDF), landing at 25th in 2018.
But there’s still a lot of space for improvement. For example, China doesn’t recognize patents for partial designs, only those for a product as a whole, so, for example, a car that has a front of a BMW and a back of Range Rover isn’t considered a patent infringement in China.
So when will we see a Chinese-made EV outside of China?
There’s a chance you already have, without even realizing it. You might want to check your local public bus operator, and see what sorts of vehicles are out there running routes.
In many cases, the owners of bus fleets are governments or private companies that receive incentives to buy clean vehicles. Both tend to be more open than individuals to buy an unknown brand—as long as it’s reliable. And that is giving Chinese companies a path into lucrative markets.
BYD, for example, has sold 300 buses in North America and company executives say it has orders in the pipeline for another 600. That’s a small number compared to the thousands of electric buses in many Chinese cities. But it’s meaningful in the US, where, by the end of 2017, only 333 electric buses were in operation. Though BYD (and most other Chinese EV makers) have no near-term plans to sell passenger electric cars in the US, perhaps a track record of commercial-vehicle success could lead international buyers to consider Chinese passenger cars.
Buses, after all, were pivotal in pushing China into fully embracing EVs in the first place. Take Shenzhen. In 2009 it was one of 13 cities picked to pilot the development of an electric public bus system. By 2012, Shenzhen’s bus system had 3,000 pure electric or plug-in hybrids—more than any other city in the country. And last year, it became the first Chinese city to completely transition its entire bus fleet—17,000 vehicles—into electric models.
Electric buses are quieter than diesel buses, which is no small thing, given that China’s environmental officials said in 2016 that a quarter of Chinese cities were suffering noise pollution. They also make economic sense, since the higher upfront costs of batteries are typically offset by lower fuel and maintenance costs through the bus’s life. The operational cost of an electric bus is two-thirds that of a diesel bus. Most importantly, they contribute immensely to China’s larger project of weaning itself off dirty fossil fuels and cleaning up the air the citizens breathe.
A BIKING INTERLUDE
There are about 250 million electric two-wheelers in the world, and almost all of them are in China. That’s nearly 100 times the total number of electric passenger cars in the world.
That’s largely because, starting in 1999, Beijing allowed some types of electric two-wheelers—those that can travel at speeds of less than 50 km (30 miles) per hour—to be used without a license or registration and ridden in bicycle lanes. Next, it restricted the ownership of gasoline-powered two-wheelers in the central parts of cities.
Today, electric two-wheelers are so common in China that they account for over 80% of the greenhouse-gas emissions avoided by the use of all EVs—in the entire world.
Market forces, unleashed
China’s had so much success using its carrot-and-stick approach to developing its auto market, that it’s ratcheting up the pressure. Starting in 2019, all Chinese carmakers that manufacture 30,000 or more cars per year will have to meet an NEV quota, that will rise in 2020. (Targets beyond then haven’t been set).
Carmakers can meet these quotas by accruing credits for each NEV sold—the fewer estimated emissions the car produces in its lifetime the higher the number of credits. If a carmaker doesn’t have enough credits, it can buy them from another manufacturer with a surplus, on a market set up by the industry regulator. The cost of credits will be determined through supply and demand.
In 2018, NEVs accounted for about 2.5% of all car sales in China. These new rules could double the number in less than two years, according to Bloomberg New Energy Finance.
Carmakers of all stripes—Chinese or not—are taking note. Volkswagen, the world’s largest automaker, sold 40% of all the cars it made in 2017 in China. The German company has announced that it will introduce 40 new China-made NEV models over the next decade. The story is the same for BMW, which sold more cars in China than anywhere else in the world last year. It already makes two plug-in hybrid models in China and plans to make two pure-electric cars there by 2020.
Of course, even at 5% of China’s car market, NEVs would still make up only a small fraction of total sales. But what’s more important about Beijing’s latest regulations is the signal China is sending to the world.
The two grand experiments
The current attempt to revive the electric car is the largest yet, with the most political, human, technological, and financial capital behind it. Better still, the world is actually running two experiments at the same time.
The western experiment is driven by mild regulations, modest government incentives, bewildered legacy automakers, and venture capitalists’ faith in tech startups. It began with high-end cars that early movers were keen to try, even though there were disadvantages, such as low range and not enough charging stations. Now, starting with Tesla’s Model 3, it’s moving to capture a mass market.
The Chinese experiment is almost the opposite. It’s driven by strong regulations, heavy government subsidies, and the top-down creation of demand for electric cars. From the start, Chinese EV manufacturers have tried to make their cars as low-cost as possible.
Largely, these experiments have run independent of each other. But, on occasion, the worlds do collide. In a 2011 Bloomberg interview, Elon Musk was asked what he thought about BYD as a competitor, and before the interviewer could even finish the question, Musk laughed loudly.
“Have you seen their car?” Musk asked. He was talking about BYD’s e6, which went on to become a popular electric taxi in China.
“Tell me why you’re laughing. You don’t see them at all as a competitor?” asked the interviewer, as Musk continued chuckling. “They are offering a lower price point.”
“No. I don’t think they have a great product. BYD…has pretty severe problems on their home turf. Their focus is, and rightly should be, that they don’t die in China.”
In 2017, BYD made more electric cars (when you include PHEVs) than Tesla. And from 2011 and 2018, BYD has been profitable. Tesla, on the other hand, has only seen two profitable quarters in its history.
Time and again the West has underestimated the Chinese model of growth. Central planning creates inefficiencies and breeds corruption, say economists. The Soviet Union’s collapse cemented those beliefs.
“China’s economy now stands as an alternate narrative to Western ideals,” summed up the New York Times in a series published last month on China’s rise. In the last 40 years, since Deng Xiaoping’s economic reforms began, China’s economy has grown at 10 times the pace of the US economy. It has pulled hundreds of millions out of poverty and created vast industries, many of which are now globally dominant. Though it has given entrepreneurs free reign, the state has kept control of major economic levers.
Its electric-car experiment is an extension of a tried-and-tested formula: create a domestic industry that lowers cost of production, generate domestic demand for the product, and then export the excess. It’s what China did with solar panels to arguably the wider benefit of the world, and now we’re seeing many pages of the same playbook with electric vehicles.
Chinese-made electric buses are already becoming popular in North America and Europe. Now the country’s EV makers are exporting passenger cars in large numbers to other Asian countries like Bangladesh, India, and South Korea. At the same time, the domestic market is growing fast and is attracting the attention of private investors—both Chinese (such as Alibaba, Tencent, and Baidu) and non-Chinese (such as Sequoia, Baillie Gifford, and Intel). Some of them are betting that startups like Xiaopeng, NIO, and WM Motors could soon compete with Tesla in the high-end car market.
What China’s been able to achieve with electric vehicles already is shocking, but what’s more shocking is this: the country’s only getting started.