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The Chinese Key to Electric Vehicle Adoption

The Chinese State Council Development Research Center Enterprise Institute, "a leading policy research and consulting institution directly under" China's State Council, just released a policy whitepaper endorsing business model innovation as the key to China's goal of rapid electric vehicle (EV) adoption.

The policy details the well-known differences between electric and conventional car technology which create barriers to rapid EV adoption:

  • Limited range when compared to gasoline vehicles (100-150km, compared to 400-500km)
  • High cost (approximately double the cost of gasoline vehicles)
  • Slow charging (6-8 hours, compared to 4-6 minutes)

US EVs: Square Pegs, Round Holes

The U.S. policy (if it can be called that) for overcoming these barriers, has been to provide purchase and manufacturing subsidies (although not nearly enough to make the costs comparable) and some local support for vehicle charging networks. Beyond these, we have relied on the hope that technical innovation in charging and batteries will reduce charging times and cost quickly.

The lack of a U.S. policy to overcome slow charging times, and only weak policies to overcome the high cost and limited range consigns electric vehicles to niches and prevents their use as truly mass market vehicles. In this context, Tesla’s (NASD:TSLAlowered guidance and possible need to renegotiate its loan covenants with the Department of Energy should come as no surprise. Tesla CEO Elon Musk attributed the massively lower third-quarter revenue guidance ($44-46 million, vs. analysts’ expectations of $83 million) to quality issues similar to those which have plagued rival Fisker Motors, but was that the root cause? Quite possibly these quality issues are a symptom of American EV manufacturers trying to make EV technology work within the current internal combustion vehicle paradigm.  This square peg, round hole approach means that problems are almost certain to pop up in unexpected places.

Chinese EVs: Cut a Square Hole

Rather than trying to force EV technology to work like conventional car technology, the new Chinese policy outlines steps to cutting square holes suited to the square peg of rapid EV adoption  in the mass market.  These models overcome slow charging and the high initial cost of electric vehicles by endorsing swappable batteries owned by their parties, such as electric utilities.

Electric utilities can charge batteries centrally, timing their charging to help balance grid loads, and can also ensure that batteries are always charges in optimal environments, extending their useful lives and extracting additional vale in the form of electric grid stabilization.

EVs designed with quick swappable batteries also solve the problem of slow charging.  An automated battery swap can be completed in three minutes, less time than it takes to fill a conventional vehicle’s tank.

China’s many compact, dense cities make limited range less of a problem.  According to the paper, average daily commutes in Beijing are less than 50 km, and a network of battery swapping stations can provide extra range when it is needed.

The paper points out that while electric bikes are still niche products in the West, they are already mass market in China, with 120 million on the road in 2010. They see new business models as the key to achieving the same success with EVs.

Chinese Models

The paper details three pilot programs as models for EV adoption around China, depending on local needs and character.

The first model is most suitable to fleet vehicles, with a single customer contracting for a large number of vehicles.  This model is similar to that which is being experimented with by some companies like GE (NYSE:GE) in the US, and is appropriate both for fleet cars and larger vehicles such as buses, delivery trucks, and sanitation vehicles.

The second model is from the City of Hangzhou, where EVs from Kandi Technologies (NASD:KNDI) designed for quick battery swapping will be paired with a network of battery swapping stations and quick chargers.  The cars will be rented to the public rather than sold, with rental stations at the city’s airport, rail stations, commercial centers, and residential areas.  The rental model allows vehicle charging, maintenance, and battery recycling to all be centralized, leading to economic efficiency.  The batteries will be owned by the local utility, allowing another revenue stream from grid stabilization to improve the economics.

The third model involves the local government promotion of particular vehicle types most suitable to the locality.  For instance, the promotion of electric buses running on a busy routes with fast charging, while a police vehicle fleet could be paired with slow charging in parking lots.

Stocks

Will China succeed in the rapid mass adoption of electric vehicles?  It would be foolish to bet against them, given the advantage of central planning and less established car culture make the country much more suitable to experimentation with new business models more suited to EVs than Western countries.  Even limited success of a few of these models has the potential to produce massive revenue growth for the companies involved.

The only U.S.-traded public company mentioned in the policy paper was Kandi Technologies (NASD:KNDI), whose mini-EVs are designed with automated rapid battery swapping in mind.  Kandi has also developed a multi-level smart garage (see photo), suitable for EV rental operations because it allows many of the company’s cars to be stored and quickly accessed in a vertical structure that uses only one square meter of real estate per vehicle.  This efficient footprint should prove a large advantage in China’s dense cities, where land is often at a premium.

Kandi stock currently suffers from a “China discount,” and at less than $5 has plenty of room for upside if the company achieves its production targets.  A recent article put the potential profits from these plans at $4.42 annually in the first year of production ramp-up, up to $13.26 in the third year.  If China’s plans for rapid EV adoption are realized, that $4.42 of earnings will likely come  in 2014, and the $13.26 (or more) in 2016.  Even a modest earnings multiple of 10 would give a stock price of $44 in two years, and $133 in four.

For those who think Chinese EV adoption will be slower than the government hopes, a good bet might be Maxwell Technologies (NASD:MXWL.) Maxwell is also reasonably valued now because the European crisis has caused delays in the adoption of the company’s ultracapacitors in hybrid car models.  Company insiders have been taking the opportunity to load up on the stock.  Maxwell makes significant profits from ultracapacitors in Chinese hybrid buses.  While it’s possible to see quick charging Chinese electric buses also use significant ultracapacitors to reduce the strain of quick charging on the buses batteries, a failure of China’s EV plans would likely lead to an even greater reliance on hybrid technology in China, which would likely be a boon to Maxwell.

I personally see both Chinese EV and hybrid markets growing rapidly, so I own both stocks.

Disclosure: Long KNDI, MXWL

This article was first published on the author's Forbes.com blog, Green Stocks on September 25th and AltEnergy Stocks and was republished with permission.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Lead image: Electric vehicle graphic via Shutterstock

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