An Update on China's Alternative Energy Vehicle Industry

The pieces of the alternative energy vehicle industry puzzle that now are in place (or will be in place shortly) provide an increasingly complete picture of the future of alternative energy transportation in China. Not surprisingly, the Chinese are well along in constructing a robust alternative vehicle industry and the infrastructure to serve it.  It is certain that that industry will become a force worldwide. 

Even if some Chinese automotive analysts’ modest estimates are to be accepted --- that in ten years time, the alternative vehicle segment of the Chinese vehicle market will only account for 10-20% of all sales --- it will be a huge market nevertheless.  And as China continues its rapid adoption of wind, solar and hydroelectricity, electric vehicles increasingly will become the renewable transportation choice.

The {Revitalization and Readjustment Program for the Automotive Industry}, which was issued on March 20, provides a three-year blueprint for the development of the Chinese alternative energy vehicle industry.  The Automotive Industry Program anticipates that capacity to produce alternative energy vehicles (all electric, electric/hybrid, gas/hybrid and ethanol/methanol powered vehicles) will reach 500,000 units/year by 2011.  The program anticipates that sales of alternative energy vehicles will account for approximately 5% to 10% of total vehicle sales in China in 2011.   By 2012 the output value of alternative energy vehicles is expected to reach 500 billion Yuan [~US $75 billion].

In addition to subsidies for the purchase of alternative energy vehicles, the Automotive Industry Program will support the establishment of model programs in large and mid-sized cities throughout China for the preferential purchase of alternative energy vehicles for public transportation (including taxis) and for vehicles used by government offices, health care, mail and other public facilities.  The Automotive Industry Program also will support the development of charging stations within Chinese cities (a trend that the state-owned sector already is pursuing vigorously). The Chinese government anticipates investing some 10 billion Yuan [US $1.46 billion] in technological research and development in the industry in order to achieve world-class levels of market penetration, technology and manufacturing. 

The {Development Plan for Alternative Energy Vehicles}, which was expected to be issued by the end of March 2010, was delayed and will not be released until at least July, 2010.  We know that the plan will include connection standards for electric vehicle recharging, subsidies to encourage alternative vehicle purchases by Chinese consumers and measures to encourage the development of a robust auto parts industry.  (With respect to subsidies, there appears to be a consensus that any vehicle that conserves energy---all electric or hybrid vehicles and natural gas, ethanol, methanol or fuel cell-powered vehicles---will be eligible for a subsidy of between 3000 Yuan and 60,000 Yuan, approximately US $400 to $8,700).  

In China, industry is rapidly ramping up to build a large number of alternative energy vehicles.   The ten most significant Chinese car manufacturers, including the China FAW Group Corporation, Dongfeng Motor Corporation, SAIC Motor Corporation Ltd, Changan Automotive, Chery Automotive, Brilliance Automotive, Tianjin Qingyuan Automotive, BYD Auto, Geely Holding Group, and JAC Motors, all have projects underway to develop or expand capacity to build alternative energy vehicles. 

According to Miao Yu, the Deputy Minister of the Ministry of Industry and Information Technology, who is regarded as one of the most authoritative voices in the Chinese government on the automotive industry, there are more than 40 Chinese companies that have alternative energy vehicles in production or under development. 

As one example, in March, the South Zhuzhou Electric Vehicle Research Institute Co., Ltd, a part of the publicly trade China South Locomotive and Rolling Stock Corporation Ltd. (SH 610766), and the Liaoning Zhuguang Automotive Group Joint Stock Co. entered into a joint venture agreement with the goal of building the largest alternative energy vehicle production center in China.  When complete -- in approximately two years -- the joint venture company expects to have the capacity to build 10,000 cars/year and another 20,000 sets of alternative energy electronic drive systems and other key components for alternative energy vehicles. 

The infrastructure that will be required to support the alternative energy vehicle industry in China is being developed by some of the largest state-owned enterprises, including the State Grid Corporation, which is concentrating on building out electric vehicle recharging capacity; Sinopec, which is focusing on developing infrastructure for natural gas and hybrid vehicles; PetroChina, which is developing ethanol capacity and CNOOC, which is also concentrating on developing charging stations at existing gas stations.  Asia Cassava Resources Holdings Limited (HK 00841), the largest exporter of dried cassava chips from Thailand to China, has become an important part of China’s ethanol supply chain.  Among its customers is COFCO, the diversified food products company, whose businesses now include ethanol refining using cassava chips as the feedstock. 

The obstacles to the full-scale development of the Chinese alternative vehicle industry are tremendous market opportunities for Western companies who control key technologies, which are crucial to the industry.  The relative paucity of intellectual property controlled by the Chinese alternative energy industry requires the Chinese to rely on foreign companies for battery and other key technologies. 

This is good news for U.S. companies, such as A123 Systems, a pioneer in lithium ion battery technology, who will benefit from the ramp up in alternative vehicle production in China.  In December 2009, A123 Systems, shortly after its own IPO, entered into a joint venture with SAIC Motor Corporation Ltd, a publicly issued (SH 600104) Chinese automobile manufacturer to develop lithium ion batteries in China.   As another example of the opportunities that the development of the Chinese alternative energy car industry affords U.S. companies, China presently does not have a domestic supplier of battery separators for electric vehicles—one of the key components of lithium batteries, which accounts for some 30% of the cost of each battery.

Celgard, LLC, a wholly owned subsidiary of Polypore International, Inc. (NYSE: PPO), which recently hosted President Obama at its North Carolina plant, and Exxon-Mobile Chemical are two U.S. companies in the microfiber battery separator industry that will benefit from the Chinese ramp up of electric vehicle production, much as American Superconductor Corp. (AMSC) has benefited from the explosive growth in China’s indigenous wind turbine industry.  

Lou Schwartz, a lawyer and China specialist who focuses his work on the energy and metals sectors in the People's Republic of China, is a frequent contributor to Renewable Energy World.   Through China Strategies, LLC, Lou provides clients research and analysis, due diligence, merger and acquisition, private equity investment and other support for trade and investment in China's burgeoning energy and metals industries. Lou earned degrees in East Asian Studies from Michigan and Harvard and a J.D. from George Washington University.  He can be reached at lou@chinastrategiesllc.com.