China faces acid test in vehicle emissions

One of the key risks Asia is facing is rapid urbanisation which is putting tremendous stress on city infrastructure. Estimates indicate that nearly 200 million people moved to cities in the first decade of this century where China alone accounted for two-thirds of the numbers.

Its vehicle population grew by 171 million units between 2005 and 2015 on the back of higher disposable incomes. Congestion and pollution have, however, become major problems in many cities across China and stakeholders are now working towards developing sustainable mobility solutions. Cash incentives to buyers have driven growth of alternative fuel vehicles since 2014.

Will the demand for new energy vehicles, or NEVs, continue once these incentives end in 2020? As pollution still plagues mega cities, Chinese government officials have extended their focus to enhancing clean energy sources within the market. Automotive emissions have become the primary target in these efforts where the development and mass adaption of NEVs (including plug-in electric vehicles) is at the forefront of these initiatives.

With generous cash incentives to buy NEVs coupled with government subsidies to encourage research and development on advanced low emission technologies, sales have grown since 2014. The sustainability of these gains is a moot point as buyer cash incentives are set to gradually phase out from 2017 before coming to an end in 2020. Product offerings have expanded but further investments will be needed to sustain growth of NEVs without the government acting as catalyst.

Domestic and foreign OEMs have now begun rebalancing their product portfolios by offering more NEVs. The focus, however, has been on small entry level vehicles. In 2015, of the roughly 113,000 electric vehicles (EVs) sold in China, 87 per cent were in the mini and small segments. Likewise, of the 63,000 plug-in EVs sold, 96 per cent comprised compact cars. With the conventional full hybrid, sales volumes were split evenly between compact and mid-sized cars.

Meanwhile, the market has shifted towards larger utility vehicles with SUV sales up by 62 per cent in 2015 from the preceding year. Growth in this segment has not slowed down in 2016 with sales up by 48 per cent year to date through May 2016. If NEVs are aspiring for mass penetration while steering clear of subsidies, the product offering will need to better reflect the changing preferences of Chinese customers.

The competitive landscape is already changing in response to market dynamics and gradual phase-out of subsidies. Though NEV development costs (particularly with pure EV batteries) remain a barrier, new players are entering the field through partnerships. Suppliers are bidding for idle capacity at existing facilities for EV production licenses while technology companies are introducing their own brands.

Recent headlines point to significant investments like 20 billion Yuan by one player in creating an automotive ecological town that includes an EV production facility charging station and after-market sales service. Two others are investing 11 billion Yuan and 5 billion Yuan to build respectively a 10 GWH battery factory and assembly plant with lithium–ion producing capability.

Such initiatives are expected to fuel NEV growth in the coming years even with the withdrawal of subsidies. Customer adoption is as critical too and while rebates spurred bulk of the growth in 2015, current volumes are coming from smaller vehicles with lower price tags. OEMs must move beyond just offering a value proposition to focusing more on safety, reliability, convenience, quality and overall driver experience to woo more buyers.

While the Chinese government has targeted production of five million NEVs by 2020, PwC Autofacts recognises the difficulty in achieving this mass level change in consumer buying behavior within this timeframe. It forecasts assembly of three million NEVs and one million conventional hybrids by 2020 which still represents significant growth.

The writer is Partner, Price Waterhouse