China’s car industry is the largest and most lucrative in the world. It is also an industrial policy failure.
Local brands have only 28% market share. By forcing the global giants to enter 50/50 joint ventures (JVs) with state owned enterprises (SOEs), central planners expected a transfer of skills and technologies from one to the other. They’ve been disappointed. The JVs, secure in their provincial bastions, relaxed on a tide of profits from foreign technology and brands.
A few private companies like Geely and GreatWall — scrapping it out in segments like budget SUVs, and exporting to Egypt, Brazil and Russia — have become the surprise successes. Although these independents also enjoy the state’s largesse (via subsidies), their survival defied the mandarins, who naturally draw their conclusion: this important industry must be shaped even more forcefully. And the future of the global automobile, as everyone from Xi Jinping down knows, is electric. He wants his nation to go “from big to strong”.
China has good reasons for its huge electric vehicle (EV) ambition. It has polluted cities. It has lots of electricity. Some have spotted a connection here, and suggest that burning coal to charge EVs may make emissions worse. But over time simpler, lighter vehicles will emerge, and renewable energy offers a smaller ecological footprint. EVs are ideally suited to autonomous driving and car-sharing. Tesla has shown the possibilities with its premium all-electric car but as one Chinese entrepreneur puts it: ‘The guy who’s making the $100,000 car is not changing the world; the guy who is making the $10,000 electric vehicle is changing the world’. New Chinese-backed startups are raising capital at home and abroad.
Whereas other major countries recognised the importance of hybrids (gasoline-electric combinations), Beijing exclusively prioritised “pure” EVs (all battery powered) in its industrial policy. There is a good reason for this. Dominant global automakers collectively have built billions of internal combustion engines. This gives them, in the view of Chinese planners, under science minister Wan Gang (a former Audi engineer), an insurmountable lead. EVs, however, offer the possibility of leap-frogging the global giants. Furthermore China’s dominance of rare earth metals — crucial for electric motor permanent magnets — emboldens its EV aspirations while making others very nervous, as a fascinating new book describes. Hybrids each use several kilograms of rare earths and pure EVs three to four times more. Beijing was notably unenthusiastic about promoting sophisticated hybrids which others (especially Toyota) have pioneered.
China has a lavish incentive program for EVs and wants five million on the road by 2020. Local brands get priority for scarce urban license plates. Financial subsidies (up to one-third of the car’s value) were so generous that they were abused. China’s EV sales mysteriously surged late last year to overtake America’s, though still fell short of Beijing’s 500,000 target for 2015. Patchy charging infrastructure deters buyers. The finance minister recently confirmed the phaseout of subsidies and a less dogmatic, “market determined” approach to promoting “new energy vehicles” of all types. Reportedly, California is seen as an exemplar. Other countries are exploring entirely different standards like hydrogen fuel cells. For now, the future of the automobile is wide open, a three-way battle between established carmakers, Silicon Valley, and Chinese industrial policy.
The global auto ecosystem has room for a variety of power plays. But in any case widespread electrification probably is essential to meet increasingly demanding fuel economy standards worldwide. And batteries remain the greatest barrier to solving safety and range challenges.
Chemistry is key. The ideal battery is safe, charges quickly, and packs enormous “energy density” (though gasoline remains far ahead). Lithium-based batteries are the best prospect today. Most Chinese firms use lithium ferrophosphate (LFP) chemistry, whereas Korea pursued the durable lithium NMC variety, and Japan the potent NCA, both having higher energy density (but using cobalt). Given their national excellence in physical sciences, the Chinese must be confident. But for now, most in the industry see LFP as trailing behind the Koreans and Japanese.
They were outraged when Beijing last month announced a ban on NMC imports, supposedly over safety concerns. Actually all of China’s reported “malfunctions” involved local LFP products. As protectionist tricks go, the NMC ban is pretty rich. Yet Japan and Korea too are past masters of the “nontariff barrier”. White-gloved quality inspectors at Yokohama’s wharves once rejected Cadillacs for minor paint blemishes. An imported Mercedes would automatically trigger a tax audit of the “unpatriotic” Korean customer.
This is about much more than lithium chemistry. The bigger issue is whether China will accept the continued dominance of foreign firms in its increasingly contested car market. Probably not. This industry is of paramount strategic importance to Beijing. Its steps towards “local certification” are a clear warning of its intentions. Tesla, already worried about China’s regulatory regime, will face rising local competition . Elon Musk, hedging delicately, may need a Chinese partner and advocate — fast. Compared to Japan and Korea, the Chinese car market was long quite open. Bureaucrats must regret this. It cannot be a surprise that, for the next electric generation, they will play a rougher game.
This post originally appeared on the Lowy Interpreter. Read the original article here.
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