x Abu Dhabi, UAEFriday 19 January 2018

Eco-Money: China takes big risk with clean-car upgrades

The Chinese market for clean cars offers a huge opportunity for the world's automakers.

The Chinese market for clean cars offers a huge opportunity for the world’s automakers. Philippe Lopez / AFP
The Chinese market for clean cars offers a huge opportunity for the world’s automakers. Philippe Lopez / AFP

The Chinese government's drive to adopt electric cars is the biggest gamble in the auto industry's history.

China is to pump US$1.5 billion (Dh5.5bn) into its electric-vehicle industry over the next 10 years to make the country a leading producer of clean cars.

The government hopes to have 500,000 electric vehicles and hybrid cars, which run both on electricity and traditional auto fuels, on the road by 2015. A pilot scheme to introduce electric cars in the Chinese capital of Beijing has already been successfully launched.

In Shanghai, the local government is reported to be planning to subsidise electric and hybrid vehicles. These initiatives are designed to offset China's reputation as one of the world's biggest emitter of greenhouse gases.

The Chinese market for clean cars presents a mouth-watering prospect for the world's car makers. With a population of more than 1.3bn, the country potentially represents a vast market.

But this opportunity also holds a number of risks. Manufacturing products for China generally involves forming close partnerships with Chinese companies. The reason behind these regulations is to allow Chinese manufacturers to learn about western technology.

But experienced car makers are wary of China's reputation for cloning western designs to make its own lower-priced products.

The level of investment needed to use renewable energy in vehicles, coupled with the complexities of manufacturing in China, means that only the world's leading car makers are in a position to compete successfully. BMW, the German car maker, for instance, is understood to be working closely with the authorities to distribute electronic cars on the mainland.

But car makers such as BMW are wary of betting the farm on the Chinese electric-car sector until a market demand for clean cars is more clearly established. Until then, the car makers are targeting specific market sectors. In BMW's case, this means starting at the top of the market and selling electric cars to China's emerging consumer class.

"The middle class in China is really starting to grow and, at the moment, we see China as a market for high-end cars," says Gavin Ward, a spokesman for BMW. "Longer term, China's vast population represents a massive opportunity for cars running on renewable energy."

But the fact that most of China's population cannot yet afford to buy a car of any kind is not the only obstacle on the country's clean-car road map. The country famously endorses a "one-country, two-systems" approach to the free market. When it suits the Chinese government, it will release the brakes on its economy. But, if it considers it necessary, it will not hesitate to impose old-style communist regulations to restrict growth.

There are fears that the government may one day draft laws to allow only a small percentage of the population to own cars. The global car industry fears that, if this becomes the case, manufacturers may eventually be restricted largely to Chinese car makers, creating an unattractive manufacturing sector with low margins.

To promote the capital's new subway, the Beijing authorities have already imposed a quota on passenger vehicles, capping new registrations at 20,000 a month.

Given the risks associated with manufacturing clean cars for the mainland market, only leading global car makers will be in a position to sell clean cars to China in any volume.

The other factor favouring the big corporations is the scale of investment needed to develop renewable energy for cars. BMW, for example, has had up to 300 engineers working on hydrogen-powered cars, a technology it believes may one day supplant electric cars. The company has also developed energy-efficiency technology that focuses on making new cars such as the 2012 BMW 1 Series more energy efficient than the fossil-fuel burning cars produced by its rival car makers.

BMW is, however, acknowledged to be ahead of the competition in its adoption of clean technologies. According to the Dow Jones Sustainability Index, BMW has been the world's most sustainable car company for seven years.

There are also niche electric car players now addressing the Chinese market. Alpha Lujo, for instance, makes a low-cost Chinese-built electric car that it hopes to export to Australia later this year with a price tag of $18,000.

The company is working towards meeting safety standards in the US, Europe and Australia and plans to establish a workshop in Victoria, Australia, to assemble cars made from parts shipped from China.

However, despite the huge potential of the Chinese clean-car manufacturing market, private investors find themselves faced with a choice between buying volatile over-the-counter shares in companies such as Alpha Lujo, or supporting traditional car giants such as BMW, which have a long-standing commitment to fossil fuels, despite their new green credentials.

Until the full scale of the demand for clean cars is more clearly established, the Chinese electronic-vehicle sector will remain a gamble, both for car makers and for investors.