Sunday, April 5, 2009

Local Govts Throw Full Weight Behind "New Energy" Auto Development

Encouraged by the attention paid to "new energy" vehicles in the Central Government's recent auto policy (Chinese), local governments have piled onto the new energy bandwagon with amazing alacrity.

Perhaps the projected output of 500,000 hybrid or purely electric autos and buses within three years is an indication of the Central Government's seriousness in becoming a global player in this market. Compare this figure with CSM Worldwide's projection of 1.1 million of such vehicles by Japan and Korea and only 267,000 by North American automakers. (Figures from Keith Bradsher's recent NYT article.)

An article this week in the 21st Century Business Herald highlights the preparation of a lot of local governments to take part in China's green car revolution. Many of these governments are forming local "new energy auto alliances" (新能源汽车联盟) that bring together local automakers, parts suppliers, universities and think tanks in an effort to plot strategy, recommend policy and ensure that local business benefits from such development.

Among the local regions that have already established formal alliances are Jilin Province, Chongqing City and Beijing City. In Jilin, First Auto Works (FAW) figures prominently as a center-piece of the local alliance, as does Changan in Chongqing. In Beijing, the central company is Beijing Foton (福田) which is controlled by Beijing Auto Group. Shenzhen, Hubei and Anhui are said to be planning similar alliances around BYD, Dongfeng and Chery, respectively.

The clear purpose here, as Bradsher's article reported, is for China to become a world leader in electric cars. To this end, China's Ministry of Industry and Information Technology also intends to convene a meeting in mid-April that will include several automakers (both foreign and domestic), State Grid and local auto industry authorities to begin planning the rollout of electric vehicle charging infrastructure (see article at Does anyone doubt that China is serious in its bid to become a major global player in this space?

While China should be praised for its proactive approach, not only toward cleaning up its environment, but in its savvy attempt to get ahead of the curve in electric vehicle technology, there are also drawbacks to its state-led approach.

Because local governments have such a stake in the success of their local firms, local protectionism has already become a key component of local auto policies. As I wrote in a previous post, the City of Shenzhen is going all out to ensure that BYD becomes a major player by buying loads of BYD's vehicles for use by city government and public transportation, and now by subsidizing the purchase of BYD vehicles by city residents. Another previous post pointed out that the City of Changchun is rebating inspection fees for vehicles purchased locally. As long as China's domestic manufacturers sell most of their cars in their home provinces, it will be difficult for any automaker to develop the scale needed to make electric vehicles at a sustainable profit.

Another problem is that local regions all over China are competing furiously to spend a lot of money on new vehicles whose technologies have basically been decided. No one is proposing anything like a "Back to the Future" car that runs on household garbage. As far as anyone is aware, all of the money is going toward variations on lithium-ion battery technology and hybrid or purely electric vehicles. A lot of duplication of effort is going on, and aside from employing a massive number of engineers, much of this spending is likely to have been wasted once these vehicles begin to hit the road in ernest.

Many people have been quick to praise the progressiveness of China's government in leading the charge to make itself into a global player for "new energy" vehicles -- myself included -- even to the point of criticizing other governments for not being progressive enough. However, I think the jury is still out as to which model will ultimately win: China's model of industrial planning, or the various degrees of market-led, government-assisted models employed in Japan, North America and Western Europe.

If I had to make a long-term bet, it would be on the unknown engineers at work in a garage somewhere in Silicon Valley who don't see the "Back to the Future" car as a mere dream of fiction.


  1. Great conclusion- it is almost inevitable that some "new energy" ingenuity has yet to be unearthed which may triumph over government-assisted models that are merely recycling current hybrid/electric technologies. We have already seen their shortcomings. However, it may also be possible that unknown engineers in China could introduce this "Back to the Future Car"- as I write this, I think about Tang Jinquan of Dalian East Energy Development- different sector, similar formula. Financial support is a major factor here, and I'm not sure if those Silicon Valley engineers are currently receiving the time, money and resources necessary for an invention which remains, at this point, science fiction.

    You write that "as long as China's domestic manufacturers sell most of their cars in their home provinces, it will be difficult for any automaker to develop the scale needed to make electric vehicles at a sustainable profit." This point was a bit unclear to me- are you stating that new hybrid vehicles will probably be sold in the provinces they were designed in, limited solely to a local market? If this is the case... what a mess.

  2. Thanks for your comments, Aimee.

    The new technology may not necessarily come out of Silicon Valley. It could come from a lab at MIT or Caltech, or, as you rightly point out, from a lab somewhere in China.

    However, while the US financial sector has fallen on hard times, I don't think that necessarily means that venture capitalists have stopped doing what they do best, which is to find and fund promising new technologies.

    I also don't think the US education system will stop turning out some of the world's most capable and creative engineers. That doesn't mean new tech can't come out of China; it's just less likely as long as China lacks the same infrastructure to support real innovation (not just incremental improvements to existing technology).

    People have been too quick to write off the US because of the financial crisis. I don't see how that stops America's creative geniuses from doing what they've always done. Will China be more competitive going forward? Absolutely! I think they will be welcomed to the fray as have been creative industries elsewhere.

    Your second question is about local protectionism. It isn't that manufacturers don't want to sell outside their home provinces -- indeed, they do. It's often that local policies so heavily favor locally-produced goods that things produced even in a neighboring province aren't as competitive.

    Local protectionism is a particularly pernicious problem that has been supposedly stopped several times since reforms began, only to raise its head again later. Until Beijing can put a stop to it, China's auto industry as a whole is competing with one arm tied behind its back.


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