China's auto companies have captured the world's attention in recent months with announcements of alternative energy vehicles, and China's government is making a concerted effort to lead and incentivize development in this sector. Some commentators have even speculated that this nascent industry may be China's for the taking. (Okay, maybe I've even joined in the cheerleading a bit myself.)
China's new comprehensive auto policy released in March contains not only a target for producing as many as 500,000 "new energy vehicles" (新能源汽车) per year by 2011, but also contains provisions for research subsidies, infrastructure support and consumer incentives.
And it seems that China's automakers have heard the government's message loud-and-clear. Hardly a week has passed since the beginning of 2009 without at least one announcement from a Chinese automaker about the development of some type of new energy vehicle, battery technology or green R&D project.
Furthermore, Shanghai's recently ended Auto Show saw the exhibition of some 50 different models of new energy vehicles from hybrids, to fuel cells, to pure electrics. Almost every manufacturer had at least one vehicle on display with unmistakeably green-sounding words emblazoned on the sides.
Another argument one often hears favoring China's future leadership is the "leapfrog" argument. China was able to leapfrog directly to mobile phones because it had not been saddled with legacy fixed-line telecom assets. Now China is poised to do the same with new energy vehicle technology. China will benefit from a "level playing field" in terms of new energy vehicle development because the technology is still in its infancy in the developed auto markets.
If none of the above is argument enough, I have two words: Warren Buffet.
Buffet is not the kind of guy to go throwing Berkshire-Hathaway's money around for social causes. When he invests, he fully expects to earn a return. This is why he has very publicly decided to buy up to ten percent of Shenzhen's BYD, the only company in the world to have put a plug-in hybrid into production. Surely this is enough reason to believe that the Chinese have a leg-up in the race to build an affordable new energy car.
I hate to be one to stop the music while the party is getting underway, but I have yet to see any convincing evidence that China can inevitably lead the world in this technology.
First, anyone who watches China closely enough knows that China's Central Government does not control everything that happens in the country. For example, the very same policy document that contains the new energy vehicle provisions also contains a provision for consolidation in China's auto industry. Even before this document was released, the Central Government had been preaching for years of the need for consolidation among China's 100-plus vehicle assemblers. Since the turn of this century, there have been exactly two mergers among major auto manufacturers.
Just because the government has proclaimed its desire to develop a world-leading new energy vehicle industry does not mean that it is destined to happen.
But what about all those announcements from China's auto companies about their new energy projects?
Earlier this week I had a conversation with a local "expert" in China's auto industry, someone who has advised the NDRC on China's auto and high technology policies. In answer to this question he asked me, "who is selling these cars in China? Who is buying these cars in China? All the companies are talking about it, but very little is actually being done. (Conversation in English, speaker's emphasis.)
His belief is that the auto companies see all of this new energy talk as a possible key to preferential policy. If they are seen to be working hard toward this goal, it may be of some benefit to them in the future.
Furthermore, he says, "if the United States, Japan and Germany have not yet figured out a way to get consumers to buy these kinds of cars in large numbers, what makes you think China can do it?" The fact that Chinese want to sit in cars in heavy traffic during a time that Chinese cities are spending billions on subways and other public transportation should tell you that environmental protection is not a high priority for them. "They will not pay a premium for a car in order to help the environment. If they could afford the premium, they would use it to buy a bigger car or a more famous brand."
And while the government has offered some pretty generous subsidies to cover the gasoline vs new energy price differential, some have questioned whether it would still be enough to convince consumers to pony up for the environment.
What about all those new energy vehicles displayed at the Shanghai Auto Show?
I have to admit that the auto show left me a bit skeptical of some of the displayed offerings. I talked with someone at the First Auto display about their "hybrid" vehicle, and though she had approached me first and asked if I had any questions about the vehicle, she actually knew very little about it. (Thinking it was a language issue, I switched to Chinese which seemed to make her all the more eager to get away from me.)
At another manufacturer's booth, I noticed that their "plug-in hybrid" appeared to be just a regular SUV with a fancy paint job and an electrical cord emerging through the front grill. I was tempted pull on it to see if it was connected to anything.
What about the "leapfrog" argument?
I must admit that this one makes some sense at first. I remember being a little embarrassed that blue-suited farmers on a train had better mobile phones than mine back in 2002. However, there's a big difference between buying a new technology invented elsewhere (as mobile phones had been) and developing a new vehicle technology to the extent that consumers can afford it and would willingly choose it.
And while I have the utmost respect for Chinese engineering prowess, I don't believe that they have already won the race. Furthermore, assuming the Chinese surmount the engineering challenges, there's also the marketing challenge. The Japanese have been at this for longer than anyone else, and they still haven't figured out how to get Americans outside of California to buy the Prius.
What about Buffet's investment in BYD?
This one has me scratching my head. So far, BYD has sold few (if any) of their F3DM plug-ins to consumers. (I saw a recent report that said they had only sold 80.) While this vehicle may indeed be available for sale, I am beginning to have doubts as to its marketability. If people really wanted them, would not BYD have figured out how to ramp up production by now?
So what's in it for Buffet?
My guess, and it's only a guess, is that BYD's battery technology may be Buffet's consolation prize. Remember that BYD was a battery company for over a decade before buying a small state-owned car manufacturer in Xi'an. From someone who has visited that factory, I understand that, while the vehicles were basically junk when BYD took over, they have made significant improvements in quality. However, I think that where BYD may be able to make a bigger splash in the world is to license its battery technology to a much bigger auto company with the scale to crank out vehicles at a price point at which consumers almost want to buy them.
BYD simply doesn't have the scale, and despite Wang Chuanfu's ambitions to overtake Toyota within a few years, they will need a lot more Warren Buffets to come forward to fund such expansion. His best bet may be to sell his technology for a cut of every vehicle that a Toyota or a GM can sell with his technology.
Don't get me wrong, I want to see a green vehicle revolution as much as anyone. I just don't believe that China has a lock on the future of this market. At this point, it's too early to declare a victor, and China has no natural advantage in this race.