WHAT MATTERS WEBLOG

In yesterday’s post I gave you an overview of the unparalleled challenges the auto industry is facing these days. Car makers will have to completely change their business model for car markets in industrialized countries. In emerging countries the situation is different in some degree.

On the one hand we have the BRIC countries - Brazil, Russia, India and China. Generally, the infrastructure in these countries is relatively advanced. China’s network of roads and highways is one of the longest in the world and it’s in a very good condition. Wikipedia tells me that the total length of China’s expressway network is more than 60,000 kilometers making it the longest after the United States’. Especially in Russia’s and China’s densely populated metropolitan areas like Moscow (10 million people), Beijing (12 million inhabitants), Shanghai (20 million) , Hong Kong (7 million), Shenzhen (8 million), Guangzhou (9 million), Chongqing (31 million in metro area)  - just to give you an idea - electric cars make great sense.

First, electric cars have zero tailpipe emissions which helps to clear the air in these cities which are struggling with hazardous levels of air pollution. Second, electric cars can save a lot of energy compared to cars with a combustion engine in areas with a lot of traffic congestion because the electric motor does not need any energy when the car isn’t moving when sitting in heavy traffic.

Third, the infrastructure for recharging the vehicles’ batteries is already existent (because a simple electricity outlet is sufficient) and fast-charging stations can easily be installed in metropolitan areas.

Furthermore, driving range is less of a problem in urban areas than in the countryside. Probably the most important reason why China and India will be forced to turn to electric cars is the financial burden of gasoline subsidies. China is among those countries that have been subsidizing gasoline and diesel fuel to keep domestic consumer prices for fuel down in order to make them affordable for the average citizen. There are many nations across Asia that have subsidized fuel, amongst India, Thailand, Indonesia, Malaysia, Pakistan and many others. Governments either absorb the costs directly or they pass them on to refineries and national oil companies that are consequently making enormous losses. But inevitably, this practice is failing and meanwhile, most governments have started rolling back subsidies which have kept fuel prices artificially low. It’s alarming how difficult it turned out to be to go this necessary step. Most gas price hikes in these countries raised storms of protest. During the oil price spike of 2008, inflationary pressures also made it hard to pass on the price increases to consumers. Vietnam for example was suffering from 26.8% inflation in July last year. Luckily the crash of oil prices in recent months allowed these countries to reduce subsidies and the gap between domestic and international prices could almost be closed. Nevertheless, as it’s certain that oil prices will take off again, various governments will again try to keep prices artificially low to avoid civil unrest. Many middle-income families in China and India spend all their money on a car and an unprecedented storm of protest would threaten the social stability if these first-time car owners couldn’t anymore afford driving. Years of  saving money would have been for nothing.

So far we know that electric cars are much more economical and friendly to the environment compared to gasoline-driven cars. Actually, that’s reason enought to turn electric. Yet there’s another point why electric cars are especially attractive for China: Electric cars are anything but complex. There are no plugs, no gearbox, no clutch, no tailpipe, no oil and generally few parts that require maintenance.  The technology is simple and not very vulnerable. Chinese car makers know that they could never challenge established Western competitors as regards quality or technology of combustion-engine cars. Regarding electric cars, all car manufacturers are at the same starting line. The F6DM, a plug-in electric car from the Chinese auto maker BYD was displayed at the North American International Auto Show in Detroit earlier this year. BYD is a leading producer of rechargeable batteries. This is a perfect example that companies whose business has never been linked to auto making are now starting to enter the auto market. BYD’s slogan is “Build Your Dreams” and since Warren Buffett - the world’s richest man and a celebrity investor - has already acquired a 10% stake of the company, it’s extremely likely that BYD will get a lot of attention in the future. A BYD executive said “In the next five to 10 years we will see big changes. Electrification will happen much sooner than people expect“. The company benefits from its expertise in battery manufacturing - a important advantage since the battery pack is the most important and most sophisticated part of an EV - and is unimpressed by high costs as they have a gigantic market in China and all around the world. The BYD F3DM has an all-electric driving range of 63 miles (100 kilometers - similar to the Chevy Volt) and if necessary, a small gas engine kicks in and extends the range to 360 miles (580 kilometers). The Shenzhen-based company is in negotiations with major Chinese utilities about a plan of building a network of fast-charging stations.

“It’s a positive cycle. More electric cars, more charging stations. It’s no use asking which comes first, the chicken or the egg. We have to put something out there first.” (BYD’s general manager for auto exports, Henry Z. Li)

Auto industry insiders argue that BYD can’t take on GM, Ford and Chrysler easily because they lack of experience in the auto business, however, they’ve a technological advantage because they’re the one of the world’s largest producers of rechargeable batteries.

“In the short term perhaps oil prices are up and down, but in the mid-term, long-term it has to go up, because it’s a limited resource. We’re looking more long-term, not just one to two years.”  (Li on the issue of how low oil prices impact their business)

The bottom line is that electric cars are perfectly suitable for emerging nations and the Chinese will voluntarily embrace this technology for all the reasons I’ve mentioned. The most obvious are that they can develop a competitive auto industry as well as limit the amount of greenhouse gases emitted into the atmosphere. The byproduct will be a reduced dependence on oil imports and the opportunity of getting away from subsidizing gasoline.

No doubt that the Chinese won’t hesitate. Now the United States should show their commitment to leading the transition. After all, President Obama made it clear that his goal is to double the share of renewable energies in the U.S. energy mix within the next three years. He is also aware that dependence on oil imports is a threat to both, economic recovery and national security.

Investment guru Jim Rogers once said that the price of oil is a function of demand, supply and terrorism. Three factors of influence mean a lot of fluctuation. Therefore, we can’t anymore afford to be reliant on oil imports and we have to learn to conserve energy. However, this does not necessarily mean to cut back on our living standard. Energy technology shows that getting away from oil is a unique opportunity in many regards. Electric cars are one example.

For developing countries in Africa, South America and in rural areas of China and India, electric cars are still a decade or more away. For these markets, car makers will have to provide cheap, yet robust no-frills vehicles. Weight reduction is key because it translates into better fuel economy. For large car makers like Toyota it may be beneficial to take over a small car maker to build up a new low-cost brand for developing countries. Since cars with air conditioning, airbag, stereo equipment, GPS, electric window lifts, etc. are anything but perfect for gravelled roads and rough climates, used-cars from the U.S., Europe or Japan aren’t suitable for all parts of the developing world.

Check out:

the fundamental transition of the auto industry

Auto industry in transition III

This entry was posted on Monday, March 9th, 2009 at 8:06 PM and is filed under Electric Cars & Auto Industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.