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China is at it again–centrally planning. But is that a good idea for the EV sector?

August 26, 2010

 

On August 18, Li Rongrong, director of the State Council’s State Assets Supervision and Administration Commission, announced the establishment of an alliance of state-owned companies to promote the electric vehicle sector. http://www.sasac.gov.cn/n1180/n1566/n258237/n258854/7500833.html

The speech confirmed for me something Tom Gage, president of AC Propulsion Advanced Vehicle Technologies, www.acpropulsion.com said when I visited him in the company’s San Dimas office last week regarding China and new energy vehicles.

“My impression is that the government doesn’t understand the industry,” said Gage.

He points to China’s announcement a few years back of a timeline for meeting stricter emissions requirements. Vehicles in most of China’s large cities should be required to meet Euro IV standards by now. Few do. The government’s plan “wasn’t consistent with the development cycle,” says Gage.

It’s a reminder that China is, after all, still a planned economy. Though some of the economy is now more or less market-based, the government still likes to do things via mandate.  And it is hard to mandate innovation.  But, Beijing considers the automotive industry too important not to meddle in. And  it sees NEVs as a way for China’s auto industry to leapfrog all those western countries stuck in old technology i.e. internal combustion engines.

But establishing a commission of state-owned companies to promote the sector will not produce the leapfrog effect that China seeks. China needs to encourage firms that have the best technology, regardless of ownership. And stop setting targets that firms will feel obligated to achieve, or at least seem to be achieving, regardless of true market conditions.

We’ll come back to Gage, and AC Propulsion’s experiences in China. First, a bit more about Li’s speech. China’s State Council is sort of like the U.S. Congress and executive branch rolled into one. Not much gets done in China without the State Council’s seal of approval. Does the State Council’s seal of approval mean something gets done,  however? Not necessarily. But it is a great place for big plans.

So, I kind of laughed as I read the text of Li’s speech because it was full of the kind of big plans, and contradictions, one expects where the Chinese government is concerned.

The new commission is to be composed of 16 state-owned companies. They range from large automakers such as FAW Group Corp and Dongfeng Motor Corp (SAIC was strangely absent, but it could fall under the “deng,” or etc. at the end of the sentence.) to state-owned battery makers such as China Aerospace Science and Industry Corp,  to major electric utilities such as the State Grid Corp. of China.

Those state-owned companies, joined in the new commission, are directed to make China’s electric vehicle industry globally competitive according to market principles, and solidify China’s dominant position in the industry,  “under the leadership of the SASAC” (the leadership of the central government, that is).

China has “already mastered the key technologies of electric vehicle development,” said Li,  and “begun the development of all kinds of electric vehicles,” and “realized the self-development and commercialization of key electric vehicle components.” Well, that’s a bit in question. But I digress.

Over the next three years, said Li,  China would achieve an NEV production capacity of 500,000 units, and NEVs would account for 5% of total vehicle sales in three years. (China produced 8.4 million light vehicles in 2009, according to J.D. Power and Associates. Production was up 49% on-year in the first seven months of 2010.)  

Hmmm. Sounds a bit like a central government pep talk, because Chinese companies—state owned or otherwise—aren’t there yet as far as technology is concerned. Let’s not even get into who is going to buy those 500,000 NEVs.

 I’m less optimistic than my friend Tim Dunne at J.D. Power and Associates about China’s chances of achieving this milestone. In the August 2010 “China Automotive Monthly: Market Trends,” Dunne expresses some skepticism. He cites JD Power studies showing hurdles to NEV sales in China are pretty much the same as those in the U.S.: range anxiety, concern that the technology is not mature, and the price.

But Dunne concludes by saying, “based on China’s past performance in overcoming obstacles, we should not be surprised if China is able to pull off its ambitious plan to create its own NEV future.”

Dunne is smart. He has spent a lot of time in China. But I can’t agree with him.  Besides the fact that it is just my nature to be skeptical where China is concerned, I’m influenced by my talks with people who have experience with China’s NEV industry. Such as AC Propulsion’s Gage.

AC Propulsion designs and produces electric vehicle drive trains, including the battery management system and the battery its self. It has been doing this for a while—its first electric drive train was unveiled in 1994. 

It has achieved some success. Among its customers: BMW Group built 500 Mini E electric vehicles using AC Propulsion technology.

http://www.acpropulsion.com/pressreleases/11.20.2008%20BMW%20Press%20Release.pdf   

Yulon Group in Taiwan is also building electric vehicles using AC Propulsion technology.  http://www.acpropulsion.com/pressreleases/10.10.2008%20ACP%20Yulon%20press%20release.pdf

AC Propulsion manufactures its drive trains at a plant in Shanghai. They are then shipped to the U.S. for final assembly. But the company would like to be doing much more than just manufacturing in China.

“We want to sell our technology into China,” says Gage. “The homegrown technology is lacking. We want to promote the adoption of our own technology.”

(A bit of a common theme among independent U.S. alt-fuel powertrain companies. See my July 20, 2010 blog about EDI.) 

AC Propulsion has developed prototype electric vehicles for several Chinese automakers, but none have gone past the prototype stage. In 2007, it built an EV for Chery Automobile Co. Chery is a state-owned automaker in the central China province of Anhui, in the growing city of Wuhu.

(I have been to Wuhu several times, most recently December, 2009.  The hotel selection is improving…sort of.  The breakfast buffet at the Crowne Plaza had skim milk, a real sign of progress. Little things can mean a lot in China.)  

Says Gage: “Chery asked us to give (the prototype)  to them for three months to evaluate.”

Chery asked AC Propulsion to leave the EV so it could "study" the vehicle. AC Propulsion declined.

AC Propulsion took the vehicle home. I drove it to lunch (At an Italian restaurant in downtown San Dimas, which is a pretty small town.).

AC Propulsion also built a prototype electric vehicle for Beijing Automobile  Industry Corp. (BAIC), a state-owned company that partners with Hyundai and Daimler in China. BAIC didn’t originally produce passenger cars itself, but the central government pretty much told the local partners of foreign automakers that they should have their own brands, or else.

As with all of China’s domestic automakers, BAIC also wants its own new energy vehicle now (also strongly encouraged by the central government). Alas, once BAIC had the prototype,  it didn’t have the money to go to production, says Gage.

“We converted their model into an electric vehicle,” he says. “But the changes need to be validated. They didn’t have the budget.”

Validation would include testing safety and crash worthiness, durability, manufacturability, and cost optimization, says Gage, as well as building several more prototypes.

One could suspect Gage of exaggeration regarding the state of China’s domestic EV technology. After all, he admittedly wants to sell his company’s technology to China. But others corroborate.

Duan Chengwu, Greater China lead analyst with IHS Automotive http://ihs.com/automotive/index.htm  in Shanghai agrees with Gage that China’s domestic technology is lacking. “Lot’s of Chinese companies can develop prototypes,” says Duan.  But “given the short history of the Chinese auto industry, Chinese companies are still learning to make product at a consistent level of high quality.”

And as I mentioned in an earlier blog, InterChina Consulting http://www.interchinaconsulting.com/en/aboutus/companyprofile/index.php

 in its “Electric Car Sector in China”  report lists battery management systems and battery film as among weaknesses in China’s domestic NEV supplier industry.

(Chery just announced it will manufacture battery film.  http://www.autonewschina.com/en/article.asp?id=5702 The quality remains to be seen.)

AC Propulsion’s experience with BAIC highlights another problem Chinese automakers face in achieving the government’s lofty NEV production and sales goals—money. Okay, the government is going to pour billions of RMB into the industry. But that will be spread among at least a handful of companies.  And as Gage points out, BMW spent millions to build just 500 electric Minis.

As well, the sales slowdown in China’s auto industry will give both state-owned automakers and private companies such as BYD less money to invest in developing new technology. http://online.wsj.com/article/SB10001424052748704504204575445263274052370.html?mod=WSJ_auto_IndustryCollection

And it is unclear if private companies will get any government money under the new plan anyway.

To be sure, something good might come out of the government-mandated alliance. Duan, of IHS Automotive, says it is a good collaborative model because it includes multiple industries that are important to the success of NEVs. “This is definitely towards the right direction,” he says.

Which brings me back to Li’s speech. Is it a step in the right direction? Hard to tell. It may indicate that the recipients of central government largesse will be state-owned companies. And they are not known for being nimble.

But, Li also said that the NEV sector may face “temporary” difficulties and problems. In that case, he said, the newly-established commission should “positively study and benefit from the successful market expansion experiences of other foreign and domestic commissions.”  (Learn from Li Feng! Inside joke.)

The benefit will be, as it has been in the auto industry as a whole, the acquisition of foreign technology. That may be through joint ventures with foreign firms. And if  Chinese companies can afford it, outright purchase from companies such as AC Propulsion.

But the most vibrant companies in China’s auto industry haven’t been the large state-owned companies. They have been the Sino-foreign joint ventures and the privately-owned companies. One of those privately-owned companies, BYD, is leading China’s BEV charge.

Here’s Gage’s evaluation of the new commission:  “It can make sense in the near term, but at some point they have to step back and let market forces into the game.”

Let’s look at the auto industry as a whole to evaluate that statement. China mandated that foreign automakers could only produce cars for sale in the domestic market by entering into 50/50 joint ventures with domestic automakers. Decades later, that requirement remains in place. When will the government step back from that requirement?

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