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 Gasgoo.com). 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.