China’s Drive to Electric Likely to Be More Profound Than That of U.K., France

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The announcement by the U.K. and France that they would prohibit the production of diesel and petrol cars by 2040 made for good headlines, but came as little surprise when you consider the pace of change in the automotive industry.

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China’s announcement last week that it was considering setting a timeline for phasing out traditional fuel cars will likely have a more profound effect on the development of new energy vehicles (NEV), for two reasons.

First, China is already the world’s largest car market, producing over 28 million vehicles in 2016, according to the Financial Times. Significant changes in a market of that size causes more than just ripples in the global automotive market.

Second, a centrally controlled command economy such as China’s has shown that policies that are robustly pursued by Beijing can achieve rapid change over short time frames. More than any other country in the world, with the possible exception of India, China has an imperative to address atmospheric pollution. The incentives in China to switch from traditional combustion engines to NEVs has already made China the world’s leading electric car market, with 507,000 NEVs sold domestically in 2016.

Beijing’s announcement, however, should not be seen as a purely altruistic move to improve the environment.

Although estimates of growth rates for NEVs vary, there is widespread acceptance of the direction. As we have seen with solar panels, Beijing can channel support and create demand for an industry with the argument that it is environmentally beneficial, yet at the same time create an industry almost overnight that can dominate globally in terms of cost and economies of scale.

In the short-term, there would be considerable environmental and economic benefits for a country with acute air pollution and largely reliant on imported oil if it could encourage a large-scale switch to electric vehicles – hence current incentives. In the medium-term the economies of scale that would be required to switch a really significant proportion of a 30 million vehicles a year market would give China a major boost on the world automotive stage for NEVs.

For several reasons, China has not been able to develop significant export markets for its automotive industry in the way that Japan or South Korea has, but it may well be their intent to leapfrog current powertrains and take the lead in NEVs in the next decade.

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Ten years from now we may well be reporting anti-dumping measures on Chinese-made electric vehicles in North American and European markets. In the meantime, if Beijing does follow through with this policy, it will provide impetus to NEV research and development being done by Western manufacturers like GM, Ford and BMW, all of which are heavily invested in the Chinese market.

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