The Chinese Key to Electric Vehicle Adoption

Tom Konrad, Contributor
October 09, 2012 | 10 Comments

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:TSLA) lowered 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

10 Comments

ANONYMOUS
October 15, 2012

Since my Volt consistently seems to go about 40 miles on a charge... And my Volt seems to get about 40 mpg when running on gasoline... It's almost a direct comparison. Which is cheaper? 60 pennies to drive 40 miles? Or... $5.32 worth of California Gasoline?

My Volt is subscribed to VotStats.com. I am tracking my fuel use. So far I can tell you that about 80% of my daily driving is electric. The remaining 20% is on gasoline at about 40 mpg.

My Volt has been a ZERO compromise vehicle for me. It has exceeded my expectations in every way. The car is powerful, refined, spacious and the cheapest cost of ownership of any car I have ever owned. I don't have to worry about range anxiety at all. I can drive on cheap USA produced electricity for short trips and I can drive on long business trips on gas. The car is quiet, powerful and fun to drive.

In California while driving on electricity my Volt is running on almost 100% USA sourced fuel. The only time I feel anxiety is when I need to burn a little foreign oil for an occasional long trip.

I think that you are selling this car short Tom. It is a FANTASTIC vehicle. Just ask any Volt owner. The Volt has the highest customer satisfaction ratings of almost any car on the road. (That's according to JD Powers AND Consumer Reports.) The Volt has also won more awards from the automotive journals than practically any car on the road. (Something like 46 at last count.)

And when you cite poor sales... Compared to what? Toyota sold fewer Prius cars in the fist two years of manufacture than Chevy has sold Volts. If you look at Volt sales over the past YEAR the Volt has consistently outsold the Chevy Corvette. The Volt has outsold several Cadillac, Lexus and BMW models. How come I don't hear you predicting the demise of THOSE cars every month when they lag behind Volt sales?

ANONYMOUS
October 15, 2012

I have owned my Volt for about a year now. My Previous car was a Toyota Camry Hybrid. I have to tell you that my Volt has been the most profoundly rewarding vehicle I have ever owned. (In 35 years of driving cars.) I lease my Volt. My Lease payment is under $300 per month. Compared to my previous hybrid car I am saving about $120 per month on gasoline. My Electric bill for the car is under $15 per month.

If you take into account that my Volt is saving me $120 on gasoline every month... The lease payment is astoundingly LOW. Probably lower than the Cruze. But to compare the Cruze to a Volt is like comparing a Cadillac to a Ford Fiesta.

The Volt is a very refined drive. It is more responsive from 0-30 than a Corvette. There is absolutely NO throttle lag. The car is almost silent. (The kind of silent that people pay Lexus and Cadillac for.) There is no jerky shifting. (Cuz there are no gears to shift.) The center of gravity is extremely low so the car corners flat. The Volt is NOT a Cruze. I know... I have rented a Cruze on several business trips. The Cruze sounded like someone was shaking a can of marbles under the hood. The Cruze vibrates and jerks at every shift. The Cruze's suspension & steering are very unrefined compared to the Volt.

Once you have driven an EV for a while... ICE cars seem like rattletraps. The Volt has also proven to be much more practical for me than my previous Toyota Camry Hybrid. The Volt's hatchback design has a surprisingly large cargo capacity. For example... I recently purchased a Weber Genesis Gas Grill at a Home Depot. The Fork lift driver could not believe that my Volt could swallow the entire thing crate and all. I drove it home with the Hatch closed.

In my area I was able to have a separate Time of Use meter installed for my charger. When I charge after 8:00pm it's costing me about 60 pennies to fully charge my Volt. I consistently get about 40 miles per charge. (With AC running.)

Tom Konrad
October 14, 2012

I do use biodiesel when I can get it (which has much lower environmental impact than ethanol) but it still has many drawbacks, of which I'm well aware. One of those drawbacks is that biodiesel is not cost-effective, just like the Volt. But for someone like myself, who drives very little, it makes more sense to use an expensive fuel than an expensive vehicle as a way to further reduce my environmental impact. It's too bad you're not aware (or even willing to consider) the drawbacks of EVs. Driving less and using smaller vehicles are the best option to reduce the impact of your transportation. Integrating small EVs into a public transportation system like China is doing seems a far better (if not perfect) solution than either straight biofuels or EVs, which is why I like Kandi as an EV investment... which was the point of the article, after all.

Mark Smolinski
October 14, 2012

Thank you for tipping your hand, and your complete bias. I will discuss this thread no further. I was WAITING for you to offer up that you used a biofuel. Well, now you are blowing up your original reasoning- COST EFFECTIVE!!! $4 of your biofuel takes you as far as a ONE Dollar's worth of electricity for the Volt (and of course mine is FREE, coming from the sun).

I must hand it to your creative writing style. You write about electric cars while having an obvious opinion against them, but you hide it well until someone gets you to write a little bit more. Good luck with your bio-burner. You may smell like french fries, but I emanate no odors...or sound. And I'll bet my car is a lot more fun, too.

Tom Konrad
October 13, 2012

My statement on the cost effectiveness of EVs is based on my own sums. Only very frequent driving and charging, under most scenarios 2+ charge cycles a day, can make EVs cost competitive with similar hybrid models. That does not mean no one should buy them, but if your budget is limited, you'll do a lot more to reduce your environmental impact by getting a small, high mpg hybrid or diesel, and spending your savings insulating your home or adding PV.

If you have all the money in the world to spend, why not donate it to Obama's reelection campaign- Romney is certain to do a lot more harm to the environment than we could offset with a million EVs.

Your Kiplinger quote bears out what I have to say; the Volt costs more than the Cruze and the Leaf costs more than the Versa. And those are not even the best comparisons. Why not compare to the Chevy Cruze Eco?

My car can use renewable energy, too. It runs on biodiesel.

Mark Smolinski
October 13, 2012

Not cost effective, what? Now I KNOW you are not following the REAL EV market. You need to peruse comments at GM.Volt-com or look up what people are saying about a lease that essentially costs them NOTHING after gas savings are considered. And then there is the likes of Kiplinger who had this to say: 'One of the most surprising things we found was that that although the Chevrolet Volt and Nissan Leaf have sticker prices nearly double those of the gas-engine Chevrolet Cruze LTZ and Nissan Versa S hatchback, both have pretty low five-year ownership costs. The Volt's costs come within $1,600 of the Cruze's and the Leaf is only $800 more than the Versa over five years.' Oil changes once every two years. Brakes that will probably last the life of the car. Going a thousand miles between fill ups of a 9 gallon gas tank- when gas is over $5 gallon in some places. Combine solar PV and a Volt and you really have the makings for savings. Don't tell people that these cars are not cost effective; LOTS of people would beg to differ. Edit: I guess I'll throw this in as one last thought. I shouldn't be hearing someone 'dismiss' ANY car that can actually use RENEWABLE ENERGY who is writing for a site called 'RENEWABLEENERGYworld.com'. Seems kind of counterproductive coming here to read this stuff when a proponent doesn't actually stand by the principle of the site.

Tom Konrad
October 13, 2012

Kandi vehicles are also for sale to the public, there is no 'prevention of ownership.' I don't dismiss the Volt because of low sales numbers so far... I dismiss them because they are not a cost effective form of transportation. They should do fine in the less price sensitive segments of the market, but battery technology and gas prices are not yet to the point where EVs can compete in price-sensitive parts of the auto market when compared to traditional hybrid technology. I hope that economic problem will be overcome soon, and full size EVs like the Leaf and Volt will become mass market vehicles in the US on both rental and ownership models. Until then, I thank people like you for subsidizing the technology's development.

Mark Smolinski
October 13, 2012

The problem is with the PREVENTION of ownership. The anger of 'Who Killed the Electric Car' is about people who wanted to own a car, had their faith betrayed and had no ability to be brand, or even product, loyal. The result is a COLLAPSE of a market (just like in the 20s when the primary manufacturer had difficulty and no one could claim title to anything, but the creditors).

Gen Yers have yet to prove anything about their long term viability to sustain our economy or make financial decisions much beyond a smart phone (I have two of them as offspring). They are certainly not brand loyal and have a propensity to change on a whim. R&D at a societal level is about figuring out if there is a market before you dump tons of money into the next BIG thing. When I add all these pieces together, the future can indeed look quite dim for these Gen Yers- a nation of renters whose choices have been dictated for them by overseas powers who led the way. But I digress.

The real engine behind our CURRENT US economy is still in the hands of a different demographic and we folks are not the kind for the square hole solution where we own nothing. Many of us are (now) seeing that the planet has limited carrying and healing capacity. Who would have thought municipalities would one day be capable of passing bans on plastic bags? Significant changes take time and it is noteworthy to compare early Prius adoption to early Volt adoption- phenomena that are really quite comparable. It will happen, but with American pride of ownership at its core, and obstinate 'you can't tell me what to do' grease lubricating the machine.

Tom Konrad
October 13, 2012

Mark-
I guess that means that you think Zipcar's model does not make sense, either? Generation Ys are increasingly not owning cars... you might consider that car ownership may have been right for older generations, but not necessarily for the future. Glad you love your Volts, though, they are wonderful cars.... just not appropriate for the Chinese middle class.

Mark Smolinski
October 13, 2012

I love BOTH my Volts, and to dismiss their acceptance is to deny that their sales numbers place them smack in the middle of all models sold in this country (half of all models, including the iconic Corvette, sold in fewer numbers in the most recent months). It will take time, and the loss of political sensationalism, before truly meaningful quantities are sold. One thing stands out from this article- the owner NOT owning the car. The commonality between the death of the original EVs back in the 1920s and the debacle of the EV-1 was that the cars were never owned by consumers. The Chinese society may view government or communal ownership as acceptable, but the 'square hole' concept described above is NOT a solution for EV adoption in the FREE world.

Add Your Comments

To add your comments you must sign-in or create a free account.

Tom Konrad

Tom Konrad is a financial analyst, freelance writer, and policy wonk specializing in renewable energy and energy efficiency. He manages green stock market portfolios. He writes articles about investing in clean energy for Forbes.com AltEnergyStocks.com....