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Who will build tomorrow's car? According to Beijing, it will be China

15 March 2017

By Sebastian Heilmann and Mirjam Meissner

China sets its hopes on e-mobility. Smart and forceful  industrial policies are geared toward grooming domestic brands and keeping foreign competition at bay. Governments and manufacturers in industrial countries will have to act fast to counter this trend.

Source: Volkswagen AG

Germany should brace itself for an attack on its status as the world’s top-notch carmaker. What can hurt the car nation more than Volkswagen’s diesel scandal and threats of higher import tariffs from the Trump administration is its failure to accelerate industrial transformation in the important field of e-mobility.

At least for now, it seems that China is better positioned to dominate this future market. With the support of smart government policy for the sector, sales of electric cars in China have risen to more than half a million in 2016, making the country the world’s largest market for electric vehicles. German carmakers will have to make fast adjustments if they don’t want to lose ground on their most important market.

China’s government has made technological change in the car industry a top priority. This priority extends well beyond the Communist Party’s five-year plans; it has been set for the coming decades. E-mobility is expected to solve China’s pollution problems and to reduce its dependence on oil imports. Competition in this market is tilted to favor Chinese producers. The plan is to establish domestic brands in the relatively small e-mobility sector as a first step on the way to acquire a leading position in other areas of the transformed car industry.

China’s offensive on e-mobility is globally unmatched

China’s industrial policymakers view domestic companies in competition with international carmakers over the technological leadership in e-mobility. They don’t stop at granting subsidies on a case-by-case basis, but they pursue a systematic and encompassing approach that is globally unmatched.

A top-notch working group around Deng Xiaozhi at the China Automotive Engineering Research Institute has outlined the flexibility of the industrial policy system that has been built up in support of e-mobility since 2009. The government started by handing out conventional grants for research and development as well as by subsidizing purchases of electric vehicles in pilot cities. The initial measures had limited effects on sales numbers, but industrial policy-makers learnt from those early experiences and adjusted their instruments to build a powerful toolkit of interlocking subsidies and structural changes.

The resulting automotive policy is far removed from a socialist planned economy, as the mobility economists Zhao Wei and Ou Xunmin have pointed out. The former system of bureaucratic resource allocation has been replaced by an elaborate system of market incentives, technological standardization and sophisticated protectionist instruments, which is constantly adjusted to match the market environment.

State support throughout the value chain

This system comprises the entire value chain: from building batteries and car electronics to designing the infrastructure for charging and networks, and to setting up models for consumer financing and usage. China’s automotive pioneers put special focus on the improvement of autonomous driving and on integrating electric vehicles into smart traffic systems. China’s strong internet companies and customers with a high affinity to technology can be of enormous help in these fields.

No aspect of e-mobility is excluded from state guidance and incentives. And all these measures serve but one goal: to bring China closer to its long-term goal of global technology and market leadership in e-mobility.

When it comes to keeping foreign competition at bay, China’s planners have replaced conventional industrial policy instruments such as subsidies with subtler protectionist measures. For example, international carmakers that want to use the Chinese charging infrastructure, have to adapt to Chinese standards. Another subtle barrier for market entry is the requirement to transmit driving profiles to Chinese authorities. This may be useful for traffic and infrastructure planning purposes, but it forces international carmakers to transmit sensitive data and raises concerns over the future protection of customer data.

International carmakers come under pressure

These concerns are legitimate in light of Beijing’s experiments with new methods of an IT-based regulatory system. China is currently building a “Social Credit System,” which will collect enormous amounts of data from private citizens companies and rate them based on their compliance with norms and regulations, but even with political expectations. This system will also impact international carmakers. Those that don’t comply with a recently announced electric car quota, have to expect a lower credit rating. As a consequence of being downgraded they might lose access to subsidies and tax incentives or face investment restrictions. They might also suffer reputation losses if they are branded as not trustworthy on official websites. In the worst case, they may be forced to stop operating in China.

All these efforts have contributed to China’s rise as the lead market for e-mobility within just a few years. Of course, the enormous speed has also created negative side effects. Chinese critics point out that the flood in subsidies has led to corruption and overcapacities. Hastily installed, but unused charging stations on roadsides have become a common view.

Yet in spite of these inefficiencies, China’s automobile market is moving in the direction intended by the government. Governments and manufacturers in industrialized countries would be ill advised to ignore the pressures created by China’s electric car quotas and social credit rating methods. The first step would be to acknowledge the distortions of the state-driven competitive race in e-mobility that is currently underway in China. The second step would be to design responses and countermeasures to avoid being driven out of the Chinese market.

A German version of this article was first published in Frankfurter Allgemeine Sonntagszeitung on March 12, 2017.

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The  Mercator Institute for China Studies (MERICS)is a Stiftung Mercatorinitiative. Established in 2013, MERICS is a Berlin-based institute for contemporary and practical research into China.

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