Will China flick the switch on electric cars?

What is the most popular car in China right now? It is not the Mercedes Benz, nor is it the Audi A6 Black Edition, the perennial favourite of Chinese government officials. It's not even the ostentatious Bentley or Rolls Royce. It is in fact, the Tesla.

Chinese elites are flocking to Elon Musk’s futuristic electric car. Tycoons from the finance and internet industry and wives of leading chief executives just got their keys from the legendary founder of Tesla himself, during a brief ceremony in Beijing.

Musk told analysts recently that his company could not meet the demand from China and promised to roll out charging stations and service centres across the world’s largest passenger car market. Warren Buffet, the Oracle of Omaha, has also invested in domestic electric car maker BYD in anticipation of growing demand for electric cars in China.

So the future for electric cars looks bright, and it should. Mega metropolises like Beijing and Shanghai already look like large open car parks, and rivers of slow moving cars are contributing to the worsening environmental crisis.

Beijing and local governments have offered generous subsidies to both car makers and consumers to encourage them to buy electric cars. The government’s industry policy is also crystal clear. It wants the country to be a world leader in this area and lead the next wave of industrial revolution in renewable energy driven development. 

But local protectionism is hampering the development of the electric industry and Beijing is trying without much success to break down intra-country barricades.

The frustration of BYD, the leading electric car maker in China, is a perfect example of how local protectionism is killing the promising industry in its cradle. Among domestic electric car makers, BYD is an early mover and offers arguably the best product on the market. The BYD E6 model has a range of 300 kilometres after a single re-charge.

And Warren Buffet is backing BYD. What more do you need? But the car maker is having a difficult time breaking into the two most important markets in China: Beijing and Shanghai.

These two cities have the largest concentration of environmentally conscious car owners who are willing to take the risk of early adoption. However, these would-be buyers of BYD in Beijing and Shanghai cannot claim 60,000 yuan worth of subsidies from their respective local governments. These subsidies are only available to locally-based manufacturers. So car buyers can only apply for the 60,000 yuan subsidy from the central government.

In addition, local governments have developed tailor-made technical standards that are designed to exclude electric cars from other provinces and cities. They maintain their own so-called catalogues of eligible cars for local subsidies; they invariably favour local car makers at the expense of other competitors.

For example, the Shanghai municipal government stipulates that electric cars need to accelerate to 50km per hour within six seconds. As a result, the heavier BYD E6 model is too heavy to be considered for a local government subsidy. And even car makers who are willing to modify their technical standards to break into the Shanghai market are still not eligible for local subsidies.

Consequently, the Chinese electric car market is becoming highly fragmented and many car makers cannot develop an economy of scale to grow their businesses. The Chairman of BYD, Wang Chuanfu, said candidly that the lack of basic infrastructure and local protectionism were the two biggest stumbling blocks for the development of the industry, according to Caixin’s in-depth cover story on the development of electric car industry.

Local protectionism is one of the cardinal sins of China’s hybrid market economy. If you catch a taxi in different cities in China, you may notice that taxis are usually from their locally based car makers. In Beijing, they are cars made by Beijing Hyundai Motor Co, a joint venture between Beijing Automotive Group and Hyundai Motor Company.

In a way, the Chinese car market resembles colonial Australia, when each colony was able to introduce protectionist measures to shelter its own industries until the Commonwealth constitution outlawed such measures in favour of a unified national market. Though BYD lobbyists have won sympathy from central government members in Beijing, including the Premier, they are still unable to convince local governments to drop their protectionist policies.

When we look at China, we have to be conscious that there is a constant battle between Beijing and the provinces over economic issues like the electric car industry. Often Beijing is handicapped to implement major reform initiatives without cooperation from provincial and local governments. BYD lobbyists are banking on the smog problem in Beijing to get much worse in order for the municipal government to change its mind on its protectionist measure.

China has the resources and the market to develop a successful electric car industry. But local protectionism is nipping it in the bud.