NEW ENERGY: Inferior Cars, Corruption Plague China EV Sector

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Bottom line: Beijing needs to overhaul its new energy vehicle policies to reward companies that truly innovate and manufacture cars that buyers are really driving.

BYD loses bulk of big bus order

A series of headlines last week showed how fat and even corrupt China’s booming electric vehicle (EV) sector has become in a very short time, spotlighting an urgent need for reform. The sector’s rapid evolution to its current state repeats a familiar pattern, which sees huge amounts of wasted investment and other inefficiencies emerge when local governments and inexperienced companies flock to industries targeted by Beijing for rapid development.

One headline nicely summarized the state of affairs, citing a new government report saying China’s EV market has become overcrowded with too many small companies making mediocre products with little or no chance of becoming globally competitive. (English article) At the same time, sector leader BYD (HKEx: 1211; Shenzhen: 002594) announced the cancellation of a major order from its hometown government, as talk swirled that rival bidders had complained about a corrupt selection process aimed at giving the business to a big local company. (English article; Chinese article)

Beijing should be commended for its big ambitions to develop the EV sector, which has the potential to not only improve China’s polluted air but could also become a major exporter. But in order to achieve its aims, the central government should retool its various incentives to create a more focused program that only rewards developers of truly cutting-edge products that drivers really want. Otherwise, the nation’s ambitious program could simply result in billions of dollars of wasted investment and thousands or even millions of old-technology vehicles collecting dust in factory warehouses.

China’s ambitious EV program dates back more than 5 years, as Beijing sought to tackle a growing pollution problem that has left many of the nation’s largest cities frequently shrouded in smog. At the same time, Beijing wants to develop cutting edge-industries like EVs to move up the value chain as rising costs price it out of the market for older, low-tech products like textiles and ordinary household items.

In typical fashion for a government that still stresses central planning, Beijing set targets for EV sales and has continually adjusted the figures higher despite lack of notable traction. Under its latest targets, central planners want to have 5 million new energy vehicles on China’s roads by 2020, which includes both pure electric and also hybrid cars.

Progress towards that target was sputtering up to 2014, when just 75,000 new energy vehicles were sold, before exploding last year with 330,000 vehicle sales. But frequent reports this year indicated many vehicles were being purchased by buyers who simply wanted to get generous government rebates and not to actually drive vehicles, forcing Beijing to re-think how it structured incentive plans.

Lack of Scale

Last week a new report from the influential China Automotive Technology and Research Center revealed that China’s new energy vehicle sector has exploded to include more than 200 manufacturers at present. The same report concluded the industry is composed mostly of small companies that lack the scale or technology to ever become serious players, with the average manufacturer producing just 3,000 vehicles a year and only a quarter of the 4,000 approved vehicles in actual production

Meantime, BYD, one of the earliest players and also considered a leader in the field, caused a stir last week when it revealed that it had lost the bulk of a $270 million order for electric buses from an operator in Shenzhen, the company’s hometown and also one of its biggest customers. BYD said Shenzhen Western Bus Co terminated an order for 2,228 buses out of a total of 2,919 that were originally purchased under a tender.

It didn’t provide any explanation for the cancellation in its announcement. But some media pointed out that BYD was the sole winner of another large Shenzhen order for more than 3,000 buses in April, and that rival bidders were expressing their dissatisfaction with the process in both instances.

Both news items point to a Chinese EV system that clearly needs fine-tuning to create a sector that rewards true innovators and discourages companies with insufficient resources from joining.

Such an overhaul could include a roll-out of policies rewarding companies whose technology is recognized by global industry experts, and creating incentives that are only awarded when buyers can prove that they are actually driving the vehicles they purchase. Such a focused approach would raise barriers to entry that would stop smaller companies from entering the space with inferior products, and would also halt vehicle purchasing simply to receive big government subsidies.

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