Beijing is turning to an old trick in its bid to boost new energy vehicles, with word of a major new program requiring local governments to buy huge volumes of electric taxis and buses to jump-start the struggling sector. I have to slightly commend China’s government leaders for their determination to boost clean energy vehicles with this kind of program that’s likely to produce a major jump in new sales. But at the same time this kind of program also looks quite ominous, as it will result in a flood of immature technology coming onto China’s roads as local governments rush to meet centrally-set quotas without regard for the commercial viability of what they’re buying. That could result in huge wasted government spending that could ultimately hinder the sector’s development due to lack of pressure to innovate.
This kind of program is far too common in China, where the central government is obsessed with setting targets and then doing everything it can to achieve those goals. In this case, Beijing has taken numerous steps to try and entice Chinese consumers to buy new energy vehicles, realizing that consumers make their decisions based on commercial factors and thus will force manufacturers to make good products. What’s more, only the consumer market can really supply the volume of sales needed to make the sector succeed.
Yet despite all the efforts, which include an infrastructure building campaign and numerous financial incentives, Chinese consumers haven’t embraced the technology yet and sales remain anemic. New energy vehicle sales totaled just 5,000 in August, up 11 times from a year earlier but still well short of the volume needed to reach Beijing’s ambitious target of having 5 million electric vehicles (EVs) on the road by 2020.
Despite consumer reluctance to buy new energy vehicles, one group that has shown much more enthusiasm for the technology is local governments, most notably in big cities like Shenzhen and Shanghai. Such governments are not only relatively cash rich, but also are often home to EV car and bus makers like Shenzhen-based BYD (HKEx: 1211; Shenzhen: 002594; OTC: BYDDF), and Shanghai-based SAIC (Shanghai: 600104). Thus those governments often formulate big plans to buy such taxis and buses, and then do most of their purchasing from local manufacturers to help meet their centrally set economic growth targets.
Realizing that local governments are far more responsive to these kind of target-setting games, Beijing has just rolled out a major new program that requires 30 percent of public transport and publicly owned logistics vehicles to use new energy technology by 2020. (English article) The directive was released by the Ministry of Transport earlier this month, and calls for new energy technology to power 200,000 buses, 50,000 taxis and 50,000 government delivery vehicles by 2020.
Some quick math will show those figures add up to 300,000, or about 6 percent of the 5 million new energy vehicle target for all of China by 2020. The new plan is specifically targeted at cities with well-developed infrastructure, meaning smaller, less affluent cities won’t have to plow their scarce financial resources into this target-driven charade.
As I’ve said above, Beijing should be at least slightly commended for this new approach, which will instantly provide a major boost for new energy vehicle makers. But as I’ve also said, this kind of new demand is largely artificial and based on government directives rather than commercial factors. Western governments seldom resort to these kinds of directives, for the simple reason that they don’t have the desired effect of building long-term viable industries. That’s likely to be the case with this newest Beijing program, which will put thousands of clean but problematic new vehicles on China’s roads.
Bottom line: China’s latest program to sharply boost clean energy vehicles through government buying looks well intentioned but misguided, and is ultimately likely to fail.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.