Leapfrogging or Stalling Out? Electric Vehicles in China

Summary

Executive Summary

China has ambitious goals for developing and deploying electric vehicles (EV). The stated intention is to “leapfrog” the auto industries of other countries and seize the emerging EV market. Since 2009, policies have included generous subsidies for consumers in certain locations, as well as strong pressure on local governments to purchase EVs. Yet four years into the program, progress has fallen far short of the intended targets. China has only about 40,000 EVs on the road, of which roughly 80% are public fleet vehicles such as buses and sanitation vehicles.

China’s EV industry faces the same challenges as companies in the West: a) high battery costs; b) inadequate range between charges; and c) no obvious infrastructure model for vehicle charging.

In addition, China’s industry is constrained by four domestic barriers.

1. China’s fragmented automobile industry lacks the capacity to acquire or develop world-class EV technologies. To date, attempts to induce foreign companies to transfer technologies via joint ventures have been largely unsuccessful.
2. Trade barriers prevent foreign firms from producing or selling EVs in China. Not only are imported cars ineligible for subsidies, there are also stringent IP transfer requirements for domestic sales of foreign-branded EVs and other “new energy vehicles.” Equally important as the international barriers, trade barriers at the city- and province-level prevent an efficient allocation of the EV manufacturing and supply chain within China.
3. The national government’s focus on developing high-end EVs that directly substitute for conventional vehicles has distracted Chinese firms from developing a strong domestic market in lower-performing EVs, particularly low-speed EVs. Such an industry, which is currently growing in spite of government policies, builds on China’s leadership in electric bicycles.
4. If coal-fired power is used to meet EV electricity demand, the absence of tailpipe emissions will likely be entirely offset by incremental power generation emissions. Without substantial changes in China’s power mix, EVs could decrease air quality and worsen health outcomes due to the high toxicity of particulate and sulfur emissions from existing power plants.

Mass EV deployment in China likely requires substantial policy adjustment. In particular, it will be necessary to permit foreign EV technologies relatively free market entry. In turn, this requires greater foreign IP protection. China must also consolidate its domestic industry and place greater emphasis on smaller, cheaper vehicles aimed at domestic, lower-end markets. Finally, if EVs are to contribute to air quality improvement, the government must ensure that the electricity powering EVs is cleaner than the current mix, particularly in Northeast regions of China.