China has become the world’s largest automotive market, thanks to drivers whose numbers far eclipse those of such former leaders as the U.S. and Germany. But while mainland producers may lead the industry by number of new vehicles sold, China has yet to develop a car brand that rivals the cachet of Audi, BMW, Mercedes, or even some General Motors marques. That’s allowed foreign makers to build lucrative businesses in the nation that help maintain their global dominance.
Now, President Xi Jinping’s determination to rewrite the rules of China’s roads to curb pollution and reduce the nation’s dependence on imported oil may have a side benefit for its automotive industry. Environmental regulations and production incentives could hasten the development of a high-volume leader in electric vehicles that might finally give China a shot at a world-class auto brand.
Helpful government hands have already fostered national champions in e-commerce (Alibaba Group Holding Ltd.), social media (Tencent Holdings Ltd.), and smartphones (Huawei Technologies Co.). Now Beijing seems determined to identify the most promising of some 80 companies developing new-energy passenger vehicles, helping the strongest producers elbow into the club of major global automakers.
“With the development of smart electric vehicles, Chinese automakers are embracing great opportunities to build higher-end brands,” says William Li, a founder of NIO, a Chinese startup that began taking orders for an electric SUV on Dec. 16, a month after it was said to be raising $1 billion-plus from investors including Tencent. “We can change lanes and lead.”
While Volkswagen AG and Toyota Motor Corp. are still finalizing their China EV strategies, mainland customers can already buy NIO’s ES8, with a range of up to 500 kilometers (311 miles) on a single charge, for 448,000 yuan ($67,830)—a little more than half the 836,000 yuan cost of Tesla’s Model X SUV in China. And NIO is more likely to succeed than many other China startups because of its financial backers, according to Robin Zhu, a Hong Kong-based analyst with Sanford C. Bernstein. Besides Tencent, investors include Baillie Gifford & Co. and Sequoia Capital.
China already leads globally in EV sales, passing the U.S. in 2015. Sales of new-energy vehicles, or NEVs (EVs, plug-in hybrids, and fuel-cell vehicles), may top 700,000 units in 2017 and 1 million in 2018, says Xu Haidong, assistant secretary-general of the China Association of Automobile Manufacturers. Almost all those cars are Chinese brands. The government has set a target of 7 million vehicles by 2025. To reach that goal, it’s doling out subsidies and tightening regulations around fossil-fuel cars.
From 2009 through 2015, the government spent 59.1 billion yuan financing purchases of NEVs. For purchases in 2016 and 2017 it may need to set aside about 83 billion yuan, figures Cui Dongshu, secretary-general of the China Passenger Car Association. To boost demand, China gives a 10 percent tax rebate to buyers of NEVs. Due to expire at the end of 2017, it was extended through 2020, people familiar with the plan say. “This is the best time to be in the electric-car industry,” says Kai Johan Jiang, chairman of National Electric Vehicle Sweden AB, which bought the Saab Automobile AB business in 2012 and wants to manufacture EVs in China.
A bigger change is set for 2019: new-energy vehicle quotas for companies that want to sell conventional cars. Companies making or importing more than 30,000 traditional vehicles in China must achieve an NEV credit score translating to about 10 percent of the score assigned to their fleet and their imports. Credits typically range from two to five points per NEV, with longer-range NEVs and pure-electric vehicles earning more credits, according to Bloomberg Intelligence, so the number of actual NEVs likely will be less than 10 percent of output. In 2020, the score jumps to 12 percent. Carmakers that fail the quota can buy credits from rivals—or face fines. The cap-and-trade system likely will help EV makers such as BYD Co. and NIO, which can sell excess credits.
“With electric cars, the cards are being reshuffled,” says Wolfgang Bernhart, a senior partner at Roland Berger Strategy Consultants in Munich. “We’ll see significantly more competition.”
That could happen far from the mainland. “It’s obvious that Chinese carmakers want to sell their cars abroad,” says Klaus Rosenfeld, chief executive officer of German parts maker Schaeffler AG. “China’s manufacturers know that it will be tough for them to compete on combustion engines in our home market. But the shift to more and more electric cars may become an opportunity for them.”
Volkswagen said in November it would invest more than €10 billion ($11.8 billion) with local partners to build 40 new-energy models in China. It wants to make 1.5 million NEVs in China—mostly electric—by 2025. Toyota won’t build EVs in China until 2020. It’s designing an EV for the market and also may sell ones developed by local partners under its brand. “When it comes to alternative powertrains,” President Akio Toyoda said in September, “it’s not so much about who gets there first, but who makes it the best.”
This year’s Future of Energy Summit in Shanghai featured a BNEF Talk on the Future of EVs featuring Colin Mckerracher, BNEF’s Head of Advanced Transport. Watch the full video here.