- November 17, 2020 Energy
Inflection Point: Making China’s EV Industry More Competitive
China has made no secret of its aspiration to lead the global electric vehicle (EV) industry and transform the automotive industry in the process. This is apparent in the 15-year plan on EVs that was released on the heels of Xi Jinping’s commitment to hit peak emissions before 2030 and carbon neutrality by 2060.
The plan’s priorities reflect an EV industry landscape that is quite different from where it started a decade ago, as I’ve written in this case study. It is neither entirely mature nor embryonic, residing in an in-between place as market competition increases and policy support retreats from propelling the EV industry forward.
That inflection point is precisely what the New Energy Vehicles Industry Development Plan (2021-2035) reflects, which also comports with the 14th Five-Year Plan’s themes. Compared to the previous EV plan in 2012, two key things stand out: 1) a shift in the type of technological advancement emphasized; 2) consumers, rather than the government, will be the key driver of sales.
Technology and Markets Will Increasingly Rule
Policymaking has adjusted in response to the rapid growth of the Chinese EV market since 2010. The main issue is no longer whether there will be a market for EVs, but rather how to build and sustain a world-class EV industry with competitive players. In other words, Beijing wants to overcome the longstanding challenge of shifting from “size of market” to “strength of industry.”
In many ways, the latest plan reinforces the fact that Beijing no longer views direct involvement as the best way to expand the EV market. On the one hand, EVs are increasingly competitive with conventional gasoline cars. On the other, central and local budget constraints have put an end to lavish subsidies.
Without subsidies, the quality and cost of EVs will increasingly determine their success and failure in the marketplace. Firms face an increasingly competitive market where consumers will vote with their pocketbooks, and the government appears fine with that. For example, the plan’s call for “the survival of the fittest” (优胜劣汰) in the industry is a rather clear indication that Beijing has less tolerance for bubbles in the industry and wants market forces to play a larger role in consolidating the industry.
Increasingly, the government is rolling out market-based incentives and programs—such as fuel efficiency standards, EV credits, and potentially the emissions trading scheme (ETS)—to favor the production and sale of EVs and new energy industries. The aim is in effect to replace direct industry subsidies with tax and other incentives.
This is why, in contrast to the 2012 plan, this 15-year plan focuses much more on integrating other technologies in the automotive sector to better prepare it for the next phase of advanced manufacturing and “smart mobility.”
For example, connectivity and smart technologies are now listed as one of three focus areas (“three horizontals”) for research and development and investment, in place of the previous emphasis on powertrain systems. Smart or intelligent (智能), as in “smart manufacturing” or “smart grid,” is mentioned 39 times, while “operating system” (操作系统), which refers to onboard software, also appears 10 times in the plan. Both had barely any mention in the 2012 plan.
The focus on technological integration is hardly surprising given the existing industry consensus that software is the future of transport in general, particularly when it comes to autonomous driving. The plan’s vision of mobility is in fact not so different from that of Tesla becoming a computer on four wheels. In coming years, the software of an EV is going to be just as important as its hardware.
To become the “Detroit of EVs” is an ambitious gambit on Beijing’s part. It will require concerted efforts to leverage the country’s current leading position in EV manufacturing and the development of new hardware and software to support the transition.
What’s more, “becoming Detroit” requires the concentration of a few dominant firms. This is why China is also more reluctant to push industrial policy to the extent it once did, fearing it will perpetuate the bubble and undermine consolidation. It will instead use more market tools to ensure that fewer but stronger players remain standing and to raise the competitiveness and efficiency of the sector.
China now has a strong foundation on which to build a world-class EV industry, especially when it comes to the supply and value chains it has built over the last decade. But the success of that strategy will depend on the ability to create an industrial ecosystem that is competitive enough to attract sustained investment and can create global EV brands. Indeed, Beijing hopes that by 2035, the likes of BYD, NIO, or Xpeng will be as much a household name as a Toyota, Hyundai, or Chrysler once was.
Ilaria Mazzocco is a Senior Research Associate at MacroPolo. You can find her work on energy and climate here.
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