How Far Can China’s Alternative Energy Vehicle Go?

Alternative energy vehicle were under the spotlight in the Chinese market during 2017, with a total sales volume of 777,000, a year-on-year growth of 53.3 percent. Blade electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV) show a year-on-year growth of 82.1 percent and 39.4 percent respectively. Automobile manufacturers such as BYD, Beijing Automobile Group and Dongfeng have all shown some impressive performance.

These fantastic sales figures do not show the whole picture of the market. Especially for a new industry, an overly fast development pace will bring tricky problems. China’s alternative energy vehicles have a long way to go.

The alternative energy vehicle industry was born with a silver spoon.

Under macro-environmental policies to limit energy use and pollution, alternative energy vehicle were considered a strategic new industry with great expectations.

Since 2009, China has supported the development of alternative energy vehicles. All kinds of preferential policies, such as government allowances, exemption from plate number controls, traffic controls and purchase tax, have been pushed through. Alternative energy vehicles became the darling of the market overnight.

Among the various preferential policies, the most significant is a huge fiscal allowance covering all the aspects along the industry chain. According to the estimation by “Security Daily”, the allowance amount for alternative energy vehicles in 2015 was 59 billion yuan, and in 2016 it rose to 83 billion yuan. The budget allocated to this industry is incredible.

Alternative Energy Vehicle of BYD

With policy incentives and capital, alternative energy vehicles have enjoyed a booming spring of growth. Various automobile companies have heavily invested in research, development, production and distribution of alternative energy vehicles. Apart from established players, such as Geely, BYD, Volvo and Mercedes-Benz, new entrants like Gree, Wuliangye, GCL and other listed companies are also trying to take a share of this booming market.

The promoted notions of “green travel” and “reduction of energy use and emission” have also influenced the mindset of people in their purchase of vehicles. All these elements add up to produce the outstanding performance of the alternative energy vehicle market. According to the data from the China Automotive Industry Association, sales of alternative energy vehicles in China rocketed from 21,819 in 2014 to 767,759 in 2017, a growth of more than 35 times.

Source: China Association of Automobile Manufacturers.

However, with the alternative energy vehicle industry developing at such speed, an alarm has struck quite a few people: in the second half of 2016, the Ministry of Finance announced 5 companies conducted subsidy fraud, with a total amount of more than 1 billion.

Some media investigated further and uncovered another 72 companies suspected of subsidy fraud of more than 9.2 billion. Scandals involving huge amounts have provoked some thoughts. People have calmed down from the craze and reconsidered the potential threats to this industry.

From the perspective of consumers, the condition is no better. Soaring sales figures cannot be taken as a proof of consumers’ willingness to purchase alternative energy vehicles – many of them are just doing so as there is no other way.

In Beijing, the constantly reducing number of regular cars makes it ever more difficult to get a plate number. With more than 900 people competing for 1 plate number, many recognize they may not be able to get a car even if they wait five to eight years. They choose an alternative energy vehicle to skip the queue.

Because of traffic pressure and the demand for car purchase, Beijing began to implement regulation for small vehicles since 2011. In 2018, the Beijing small vehicle limit is 100,000, among them the regular vehicle limit is 60,000 and the Alternative energy vehicle limit is 60,000. The purchase permit is obtained by lottery.

Many users have given negative comments on the performance of alternative energy vehicles considering the cost. “Shortening battery times”, “high maintenance costs”, “hard to repair”, and “not worth a penny on the secondhand market” are just some of the frequent complaints.

Government subsidies may be to blame for some setbacks.

One thing we must acknowledge is that preferential policies and fiscal allowance are necessary for the development of alternative energy vehicles. But the existence of widespread fraud also demands we reflect on those policies.

Like other industries, the alternative energy vehicle industry also follows a lifecycle of appearance, growth and maturity. Generally speaking, such a lifecycle can be divided into four stages of introduction, growth, maturity and adjustment, and each stage of development demonstrates a different characteristic.

Source:Suning Institute of Finance

One thing worth attention is that, like other industries, alternative energy vehicles were born with a strategic mission. If the development of such an industry is totally in the hand of the market, then the costly research and overwhelming technical risk would be beyond the capacity of any regular automobile company. That would slow down the development of alternative energy vehicles.

At such a time, the proper intervention of administration and state can help focus resources on research, production and promotion of alternative energy vehicles, and largely accelerate development efficiency.

With the maturing of technology and expansion of the market, policy support has started to weaken. Eventually, the paddler will be the steer man. The current focus of work should be to integrate the alternative energy vehicle industry and supporting industries to promote step by step the democratization of alternative energy vehicles.

Source:Suning institute of finance

However, industry policy usually comes with a lag. The alternative energy vehicle industry has enjoyed an exponential growth at the initial stage. The lag of policy allows room for profiteers and leads to the occurrence of subsidy fraud.

Relevant departments have made systematic strategic adjustments to address these problems and to define responsibilities. This can be a good news for the virtuous development of industry. For example, compared to the previous plan, the recently published “2016-2020 Alternative Energy Vehicle Promotion Fiscal Allowance Policy” has made major adjustments to qualifying beneficiaries and subsidy amounts.

Nevertheless, offering subsidies to the tune of hundreds of billions of yuan is a huge expense for the state, and may not be a sustainable measure. In recent months, there have been a couple of setbacks, which is an indication that the automobile companies may enjoy less and less preferential conditions.

On January 20, 2018, Miao Wei, Ministor of Industry and Information Technology, said

A setback of subsidies for alternative energy vehicles is meant to be in place. Rather than a one-off adjustment toward the end of 2020, several adjustments during several stages may buffer the shock, making it easier for the market in this transitional period.

This indicates that subsidies may be reduced very soon. For the alternative energy vehicle industry, this could be a huge pressure and a major challenge in the future.

China’s Alternative energy vehicle company NIO has released its first mass-production car: NIO ES8.

Two Dilemmas Faced By Alternative Energy Vehicles

What will happen to the alternative energy vehicle industry without strong preferential policies?

We must come to realize that, to achieve sustainable development, an industry must be self-reliant rather than constantly depending on external support.

Preferential policies alone are not sufficient for the alternative energy vehicle industry to have a healthy development and to achieve global success. Companies must also establish their own competitive advantages. Meanwhile, government must shift its role to providing a beneficial environment and promoting industry integration. Only in this way, can the alternative energy vehicle industry go out of the greenhouse of policy to achieve its strategic mission.

China’s alternative energy vehicle industry still has quite a few problems to resolve. Namely:

On one hand, the core technology has not seen a major breakthrough. All the various technologies are still limited by their batteries. Compared to countries like the US and Japan, China is still lagging in this area. Short battery life and lasting time are some of the major problems. This not only significantly lowers the user’s satisfaction and approval, but also largely increases the maintenance cost of alternative energy vehicles and accelerates their depreciation.

According to Roland Berger’s report  2017 Q2 Global Electric Vehicle Development Index published in July 2017, China remains at the lower end in terms of technology, even though it has been among the top in terms of alternative energy vehicle industry and market scale.

Domestic manufacturers should not be blinded by sales performance: there is still a long way to go in terms of technology.

Source:Roland Berger

Secondly, the supporting infrastructure is still to be improved. In 2012, the ratio of alternative energy vehicle number to charging stations was 1.7 to 1, while this number was 7.8 to 1 in September 2017. The widening gap will lead to two problems.

On the one hand, the shortage of charging locations cannot meet the ever increasing users’ need; on the other hand, due to the limitation of current technology level, the charging time can last a few hours. Many users have to queue for charging because of the limited number of stations. This inconvenience not only wastes time, but also damages users’ experience.

Source:Suning institute of finance

In comparison, the regular vehicle industry enjoy superior infrastructure. By the end of 2016, there were more than 100,000 gas stations across China, with 1.2 million gas pumps available at the same time. Each refill only takes about 3 minutes. Judging from those facts, if given equal accessibility, most people would prefer regular cars to electric ones.

After all, the market is god: if the market stands opposed, it would be hard for a company or product to survive, not to mention develop.

How Far Can Alternative Energy Vehicles Go?

In the long term, alternative energy vehicles replacing traditional vehicles is an inevitable trend. Not only in terms of energy consumption, pollution reduction, and environmental protection, but it is also important in terms of socio-economic value and state security.

On one hand, compared to major Western industrial powers, China’s automobile industry still has a weak foundation. The clearest evidence is all the imported cars running around on the street: domestic cars are few and far between. To promote made-in-China products to the world and to get its share of the global value chain, China may as well use alternative energy vehicle as an entry point to surpass or dominate. After all, China is not that far behind in this matter compared to developed countries.

On the other hand, China has limited access to oil and coal. As the world’s largest importer of these resources, China has long been reliant on external crude oil. The recent years’ effort to develop shale gas and combustible ice are also a lesson learnt from past experience. Against this macro environment, the shift from oil to electricity for energy is an inevitable trend. And automobiles, an industry largely reliant on oil, is subject to this shift. To have an clear and critical judgement of the situation, and to develop alternative energy vehicles, is a wise step to take.

However, it requires the double effort of technological breakthrough from automobile companies and the improvement of infrastructure. With heavy fiscal support, the latter would not be a major challenge. The problem of a technological breakthrough could be a harder question facing companies.

This article by Suning Institute of Finance originally appeared in Huxiu and was translated by Pandaily.