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June 28, 2018

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China at forefront of electric car revolution

ELECTRIC vehicles are transforming the auto market. China will be a crucial market for the technology and could produce future global leaders.

Electric vehicles have dominated headlines about the auto sector in recent years. Every announcement — from governments around the world committing to a timetable for phasing out internal combustion engines to plummeting diesel vehicle sales (especially in Europe) and excitement over new models at car shows — seems to give another boost to EVs.

However, while EVs are widely considered the technology of the future, the reality is more prosaic. Globally, sales remain at a low level — high costs, limited charging infrastructure and consumer concerns about range anxiety continue to hold the market back. Nevertheless, it is clear that the industry is moving towards an electric future because of regulatory change focused on emissions standards, which are becoming tighter all the time.

The only way manufacturers will be able to meet new emissions targets is by significantly increasing EV volumes. In Europe, car makers had expected diesel engines to play a major role in CO2 emission reductions but the VW scandal has triggered a sharp decline in sales, meaning electric has become even more important. Currently, regulations focus solely on the environmental impact of EVs in terms of emissions rather than their broader implications such as how EVs, and particularly their batteries, are manufactured and how the electricity which powers them is generated.

It’s impossible to predict which companies will dominate as the auto sector transitions to hybrids and EVs. Japanese companies such as Toyota and Nissan were early movers in the sector while Tesla has captured the world’s imagination and proved electric cars can be desirable to the public (though it has so far failed to scale up production). All major auto makers have electrification strategies now. VW, for example, plans to launch 80 models by 2025.

The fast-shifting shape of the auto market could create an opportunity for Chinese car makers. While Chinese companies tend to be behind their global peers technologically, China has a huge domestic market, enabling its companies to build scale. EV market share in China is in line with the global average. But sales volumes represent 43 percent of production worldwide; China currently has the largest number of EVs on the road with over 1.2 million units in operation.

Moreover, the government is pushing electrification strongly, using both supply- and demand-side measures, to better position its auto industry and combat chronic urban pollution. On the supply side, companies that manufacture or import more than 30,000 vehicles must obtain an energy vehicle score (linked to zero- and low-emission vehicles) of 10 percent in 2019 and 12 percent in 2020. The government has also made it easier for local companies to cooperate with international players by lifting the bar on having more than two joint ventures.

Demand-side measures designed to support EVs include an exemption from license-plate lotteries and registration fees that apply to cars with internal combustion engines in several major cities such as Beijing or Shanghai. China also provides monetary subsidies that, for a representative mid-sized car, amount to approximately 23 percent of the total EV price; lower than Denmark (49 percent) but higher than Germany (13 percent), for example.

As well as supply- and demand-side support, one factor that could play an important role in making China a driving force in EVs is the public’s readiness to embrace new ideas. A survey by PwC shows that compared to the US and Germany, more Chinese say that the next vehicle must be electric and have autonomous and connectivity features.

This enthusiasm for innovation could also have implications for the business models used to get EVs into the market. Both manufacturers and startups are experimenting with a wide range of leasing and mobility models — the car-sharing divisions of Daimler and BMW (Car2Go and DriveNow) have recently announced a merger — but China’s scale, eagerness to adopt new ideas, and the difficulty of installing charging facilities in urban areas (where most people live in apartments with limited parking garages) could give new business models additional momentum.

We would estimate that the total cost of EV ownership — including both upfront costs and ongoing fuel and maintenance — could reach parity with internal combustion engines in four to five years.

At that point, the scale benefits of China’s domestic market will begin to have a major impact and could help to turn its auto makers into global players at the forefront of the electric revolution. EVs could experience an acceleration of their growth in market share.


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