2030 Finance | December 11, 2019

Speeding down the road to electric vehicles, powered by China

Amy Cortese and Jenna Tsui
ImpactAlpha Editor

Amy Cortese

Guest Author

Jenna Tsui

ImpactAlpha, Dec. 11 – The global future of electric vehicles is now – in China. 

China dominates the market for EVs. Last year, more electric vehicles were sold in the country (more than one million) than the rest of the world combined (about 800,000). 

“China is leading the world to an electric car future,” proclaimed a Bloomberg headline last year.

EVs now represent more than 6% of car sales in China, up from 1% in 2016. Last week, China’s Ministry of Industry and Information Technology upped its goal for “new-energy vehicles” (which include hybrids and fuel-cell vehicles) to 25% of new car sales by 2025. In addition to passenger EVs, government policy has spurred the sale of 200 million electric motorcycles and 425,000 e-buses.

Growth has slowed as the government pulls back from aggressive early incentives and subsidies for electric vehicle purchases. But by focusing on building out supportive infrastructure, like a nationwide network of chargers, and ramping up “new energy vehicle” requirements for automakers, the country is gearing up for a broader mobility transformation. China already has about 800,000 charging stations, or about eight times as many as the U.S.

The country dominates the global market for lithium-ion batteries, the key enabling technology for electric vehicle production. Battery prices have fallen on a familiar technology cost-curve as volumes ramp up. China also controls most of the raw materials crucial to battery production.

Under pressure from the government, foreign car companies are moving quickly to expand ramp up their roles in China’s EV market. The BMW Group’s partnership with China’s Great Wall Motor, announced last month, will manufacture electric versions of its iconic Mini. The joint venture, Spotlight Automotive Limited, is spending €650 ($715 million) on the new factory, which is expected to produce up to 160,000 vehicles annually when it is completed by 2022. 

Also last month, Volkswagen China Group and its Chinese partners said they would invest $4.4 billion toward production of 600,000 EVs a year, across 30 different models.

Renault and the Jiangling Motors Corporation Group set up a joint venture for electric vehicles in China in July. And Tesla, the U.S. electric automaker run by Elon Musk, is set to begin delivering its first China-made Model 3s around year-end. Its Shanghai Gigafactory factory is expected to produce 250,000 EVs annually.

Globally, consumer purchases of EVs helped push financing of low-carbon transport to $141 billion in 2017/2018, up 54% from the prior two-year average, according to the Climate Policy Initiative. 

“When economics, regulation, infrastructure, corporate interest and consumer appetite are aligned change can happen quickly,” says Impax Asset Management’s Jon Forster. Impax, which says its Asia-Pacific and public- and private-equity strategies are aligned with the Paris climate agreements, manages more than $18 billion in assets.  

Shifting gears

EVs are key to global plans to reach the Paris climate agreement’s goals of net-zero carbon by 2050—but only if the electricity powering the vehicles is itself clean. Transportation accounts for roughly one-quarter of global greenhouse gas emissions and is the fastest growing source of such emissions. China, which gasps under some of the world’s worst air pollution, is still heavily reliant on coal power. 

“They need a mass-produced, highly scalable, rapidly deployable, renewably energized solution,” said Desmond Wheatley, the CEO of Envision Solar, a San Diego maker of solar EV charging infrastructure. He added that products like his that offer a potential solution may be held back by the U.S.-China trade dispute. 

“New energy vehicles” are a pillar, along with advanced robotics and artificial intelligence, of China’s “Made in China 2025” plans to dominate strategic industries. EVs are also strategic to China’s efforts to reduce pollution and oil imports.  

Despite a slowdown of EV sales in China as subsidies have shrunk in recent months, automakers view the Chinese EV market as critical to their future success. “China is way ahead on EV policy,” says Tu Le, managing director of Sino Auto Insights in Beijing. “They’re forcing the automakers to make big bets in China.”

The government has aggressively nudged the market along with incentives and subsidies, and has seeded local EV ecosystems around the country. Its heavy-handed approach has sometimes backfired at home. The subsidies spurred the launch of nearly 500 Chinese EV startups; most are struggling and investors have fled. To weed out the field, the government in March reduced EV subsidies and raised the technological standards that EV makers must adhere to. 

Still, given China’s massive size and influence, its actions are hastening the inevitable global shift from gas-powered vehicles to electric-powered ones. 

Driving the global shift to electric: government bans on sales of new gas-powered cars, increasing demand, falling costs and improving performance of EVs. EVs are expected to be less expensive than conventional gas-powered cars by 2025 if battery prices continue to fall. The International Energy Agency estimates that number of EVs on the road worldwide will hit 125 million by 2030, up from about 5 million today. 

Automakers “don’t want to be on two different platforms for a number of years,” says Le, referring to today’s internal combustion engines and the electric engines of the future. It’s more efficient for them to standardize on one chassis and tweak it for local markets. For automakers, he said, “the question is not if we need to manufacture EVs. It’s when we should move everything over and how long that process should take.” 

Until recently, Chinese companies have had the Chinese EV market largely to themselves. One prominent Chinese EV maker, BYD, short for “Build Your Dreams,” has Warren Buffet as an investor. Singulato Motor has raised more than $2 billion for the production of electric SUVs in 2018. Beijing lifted the ban on foreign ownership of local car ventures in 2018, but foreign factories and investors represent just 5% of the market, with imported EVs accounting for another 3%. 

The exception is Volkswagen, which has been a pioneer in the Chinese auto market, operating in the country since the1970s. Its Chinese division has delivered a total of 3.34 million vehicles to Chinese consumers this year, and one in five cars sold in China is now a Volkswagen, according to Volkswagen Group China’s Stephan Wöllenstein. 

Most of the company’s new $4.4 billion investment will go towards EV factories in Shanghai and Foshan, to be built with Chinese joint venture partners SAIC Motor and FAW Group. “Our continued investment is charting the right course,” said Wöllenstein, who has committed his company to carbon neutrality by 2050.