MoVing Forward But not as Fast as ExpEctEd - Solidiance

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According to the International Energy Agency (IEA), China is the largest consumer of energy, exceeding that in ..... Sol
EV IN CHINA Moving Forward But Not As Fast As Expected ...

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As The World’s Largest Consumer of Energy,

China Needs a Push to Be Green.

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China Energy Consumption (2005 - 2020E)

Energy Efficiency (2010)

4,000 3,000 100% Increase

2,000 1,000

2005

2006

2007

2008

2009

2010

China

4.20

U.S

6.50

EU

9.30

World Average 6.20

2011 2015E 2020E

According to the International Energy Agency (IEA), China is the largest consumer of energy, exceeding that in the US, recording an overwhelming doubling of energy consumption in 2012 compared to 2000. At this pace, China is expected to double this consumption again by 2020 making it responsible for 25% of the worlds total energy consumption. The challenge is adding up with the fact that China has also been recorded as the largest pollutant emitter driven by its growing industrial and construction activity while being unable to conserve energy accordingly. Actions have been undertaken following the promotion of ‘green’ activities in China, including the current 5-year plan target of cutting down energy intensity by 16 percent through the increased use of alternative energies and green building development.

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As the Largest Energy Consumer, Automotive will be specifically targeted by Chinese regulation to

Improve Energy Efficiency.

China Energy Demand by Sector (2010 Vs. 2020)

CAGR 762

4.4%

312

5.2%

820

1.4%

495

1000

188

500

794

Industry

1782 1902

Domestic Transport

536

Residential & Others 2010 Industry

CAGR

Millions tons of CO2

Millions tons of oil equivalent

2000 1500

China Energy Demand by Sector (2010 Vs. 2020)

0.7%

5.0%

873 565

4.7%

895

2020 Transport

Residential & Others

2010

2020

Being the largest manufacturing center in the world, industry contributes to over 50% of total energy demand in the country while transport is expected to grow at a faster rate. Road transport has been and is expected to remain, the largest energy consumer with the significant increase in sales of auto vehicles, especially private cars, which is projected to hit 200 million units by 2020. With dependency on gasoline, private cars are the largest contributor to energy consumption in China, as well as the worst CO2 emitter, causing the government to take direct measures to combat further pollution with policies ranging from new standards/regulations, policies, subsidies, as well as investment in the development of alternative fuels. Source: Asia Pacific Energy Research Center Database

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Aggressive standards & targets have been put into place to achieve the goal of being ‘green’.

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Fuel Consumption STANDARDS

50

40

Unit: Km/ Gallon

30

20 2010

US

2015

CHINA

JAPAN

2020

EU

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Emmision Level STANDARDS

3.5 3 2.5 2

Unit: g/ kwh

1.5 1 0.5 0 2010

2015

2020

China’s government has launched aggressive targets for decreasing fuel consumption and emission levels. For fuel consumption, target has been determined based on weight-class by 2015, especially towards passenger cars and SUVs where SUV sales are projected to triple by 2020. This target is expected to increase the proportion share of non-fuel fossils among energy consumption to 11.4% and15% by 2015 and 2020 respectively. The CO2 emission reduction target is expected to reach 17% per unit GDP by 2015, through the inclusion of a number of cities across various provinces in a pilot run, which will eventually be expanded into a national scheme. About 10,000 companies in the automotive sector have been encouraged through different incentives to meet the emission and fuel consumption targets. Penalties are expected to be imposed for those who fail to comply.

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25 tier-1 & 2 cities can enjoy multiple benefits during the pilot run, encouraging both public & private sectors to promote ‘green’ vehicles

Extreme High Moderate Low

Pilot Cities

Among the 34 provinces* in the country, 25 cities across 20 provinces and municipalities have been selected for the pilot run Selection is based on: • CO2 intensity • Local presence of mid- to large-scale auto and/or auto component makers, • Potential of hosting national and/or international events Benefits enjoyed in these select cities both for suppliers & users take the form of R&D incentives, purchase subsidies and tax exemption related to ‘green’ vehicles Source: Annual report on automotive industry in China (2012) * 34 Provinces includes municipalities

ENFORCEMENT R&D Incentives

Purchase Subsidies

Tax Exemption

IMPLEMENTATION ‘863’ project, providing incentives to auto & auto component makers in the development of ‘green’ vehicle Discounted prices are provided during purchase of vehicles both for public & private entities Tax relief is available during the purvhase of vehicles in public & private entities

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Many different types of ‘green’ vehicles receive encouragement from the government with the lowest emitting type (NEV) receiving the greatest benefits, however market adoption remains low

FULL GASOLINE

NON-GASOLINE

Alternative Fuel Vehicle

Hybrid Electric (HEV)

Plug-in Hybrid Electric (PHEV)

Battery Electric (BEV)

Engine

Engine & Motor

Engine & Motor

Motor

LNG, Bio-Fuel

Gasoline & Battery

Gasoline & Battery

Battery









RMB 3,000

RMB 3,000

RMB 35,000*

RMB 60,000

50%

50%

100%

100%

Energy Saving Vehicle (ESV)

Energy Saving Vehicle (ESV)

New Energy Vehicle (NEV)

New Energy Vehicle (NEV)

Power Converter Fuel Source R&D Incentives Purchase Subsidy (National) V&V Tax Exemption Category

*New subsidy policy published in Sept. 2013, maximum subsidy to PHEV was reduced from RMB 50,000 to RMB 35,000.

Performance

Technology readiness

Emission level

MARKET COMPETITIVENESS Source: Solidiance primary and secondary research

Infrastructure readiness

Willingness to pay

Among the current available technology, BEV has received the most benefits through different subsidy schemes to stimulate the interest from both public and private consumers. Despite the attempt to make BEV an attractive option to OEMs and consumers, it still struggles to achieve sales as consumers doubt it’s performance reliability and are concerned by the lacking infrastructure required to support BEV. Facing pressure from the government on complying with new emission level standards, while faced with low consumer demand for BEV, many OEMs have found a shift towards HEV & PHEV as a way to adapt to the market requirement and bridge the path to achieving BEV adoption in the future.

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In the next 2-3 years, HEV will emerge as a stop-gap market leader in China’s quest for pure electric vehicle adoption.

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Cummulative Sales Vs. Target (in ‘000 units) 2020 NEV Target

5,000

75% Gap

4,000 3,000 2,000 1,000

2015 NEV Target 70% Gap

2012

2015E

2020E

(in ‘000 units) HEV

33.9

124.4

469.1

PHEV

3.8

15.8

198.9

BEV

17.7

100.2

932.8

Total NEV

21.5

116.0

1,131.7

Source: Solidiance primary research & analysis

Significant government incentives are in place to further encourage NEV’s production in light of the aggressive targets which most market players perceive to be unachievable. Alternatively, HEV which currently occupies ~60% of the total green vehicle market, is expected to fill in the gap in the short term through a relatively more mature technology and improved market exposure. However, with the continuous investment by the central government, OEMs, and infrastructure players, NEV is expected to gain popularity when the market is capable to support a NEV enabled infrastructure (charging stations, etc.). Some OEMs have laid out plans for NEV production to expand more visibly in the next few years, e.g.: Dongfeng & BAIC to start in 2014.

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The current development stage of BEV does not meet the requirement of consumers in terms of Price, Performance, and Convenience

“Driving a BEV taxi gives more profit as electricity costs less compared to gasoline. However for a private purchase I would not consider it today. It is expensive and the safety and performance has always been questioned. For example, during high temperature periods in the summer, BEV can’t be driven on the road based on previous accidents due to burn-out.“ - A BEV Taxi driver in Hangzhou

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Breakdown of BEV in Use by Consumer Type

Rank of Inhibitors for Green Vehicle Promotion Unfamilliarity

16%

High Price Immature Technology

84%

Insufficient Infrastructure Limited Models

Public Sector

Private Sector

So far, the use of BEV is mainly seen across public sectors, e.g. city bus, taxi as private consumers are not familiar with this vehicle type even in the big developed cities. Most of the new-sales of passenger vehicles in China come from first-time buyers, emphasizing on cost-effective performance and after purchase convenience, including fuel refill and access to maintenance. In addition, the concerns on the immature technology, such as: limited driving distance and lengthy charging time add to the unattractiveness, e.g.: SAIC Roewe E50 can only run at a maximum of180 km with 8 hours full charge time); not to mention the risk of battery overheat.

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Low market demand for EV’s precipitates a cyclical effect of minimal investment in necessary infrastructure to support the EV adoption rate, and the few subsidies for infrastructure players that exist is not enough.

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Development of Charging Stations Up to 2012, the number of completed charging stations are only ~85% of the expected total targeted number, and still less than 80% are even operational.

50,000

Expected number of stations

300

Considering the current market realities, infrastructure players are also pessimistic that the target of 2,000 charging stations by 2015 can be met as they do not see any immediate shift in demand within the next 2 – 3 years while the ambitious target of 2020 can only be met if the market situation experiences a dramatic change.

2,000

257 2012

2015 (Target)

2020 (Target)

High Investment Vs. Low Return Constructing a single charging or battery-switching station would require up to CNY 5 to 10 million, with equipment taking up the lions share of that value. In addition, insufficient electricity provision in many of the areas are becoming a significant obstacle as many of the constructed charging stations can not be put into full operation. (e.g.: Sinopec’s charging station in Shenzhen can not run due to the lack of electricity access). With the current development of in-use NEV, many charging station operators are either stopping operation or operating at a loss; hence, many of them are betting heavily in this sector and further investing in it.

No Standardized Method for Battery Charging / Switching Operational best practices and norms are still unclear as key stakeholders continue to debate the optimal battery management process. Three potential charging/switching modes include: slow charging, fast charging, and battery switching. National infrastructure players favored battery switching, expecting a centralized & continuous business in the future while OEMs especially foreign ones such as Toyota and Nissan support slow/fast charging mode in order to control the development of core technology.

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“Our charging station in Shenzhen has never come into use since its establishment as we cannot secure the power distribution from National Grid “ -Head of Sinopec Charging Station

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Failure for the OEMs across the industry to meet the overly aggressive goal set forth by the government, has caused many to pause their BEV development initiatives.

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Despite significant reinforcement from the central government, OEMs remain reluctant to pursue the central governments targets without a more substantial ROI. They believe producing a simpler, more conventional product would more effectively meet the market demand through innovation focus on fuel savings and better performance despite the pressure from the government on emission levels improvements.

IMMATURE TECHNOLOGY Lack of experience and capabilities, coupled with limited availability of qualified suppliers led to high production cost. Lithium-ion battery, which accounts for more than half of the total cost, has not yet been well-developed and components, such as electrode and electrolyte restrict performance. Compounding the problem, foreign OEMs are reluctant to develop the technology within China due to patent infringement concerns which are common and justified in.

HIGH DEPENDENCY ON GOVERNMENT With low market demand, OEMs rely heavily on policies & subsidies from the government to initiate work on BEV development. Poor implementation of regional governments in some areas also disrupt the cash flow of OEMs as they will need to provide incentives to consumers before receiving the reimbursement from the government within 6 months. Many provinces in China support the development of BEV by local OEM, which inhibits the national expansion of leading OEMs in the country.

“WAIT AND SEE” STRATEGY With many challenges and obstacles in the market, most OEMs shifted focus away from BEV development despite the continued rise in subsidies for BEV. For example, BYD has been reported to offset its loses in 2012 due to low sales of BEV with the new launch of an HEV series in 2013.

“Costs of R&D is relatively cheap compared to the costs of production, so OEMs are waiting for the market demand.“ -Manager, General Motors China

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In order to meet the national target in terms of fuel consumption, the government & OEM’s require expanding development of HEV solutions first as a transitional predecessor to pure BEV.

BEV

Inhibitors

Low Market Demand

• Cost • Performance • Convenience

Limited Infrastructure

• High Investment; Low Return • No Uniformity / Standards

OEM “Wait & See”

• Immature Technology • Subsidy & Policy driven

HEV is expected to fill in the gap and bridge the transition to BEV through: • • •

Increasing market demand by meeting consumers’ requirement Reduce dependence towards infrastructure while it is being developed Work with the current available technology to meet the national target of reducing fuel consumption at the national level

While HEV is believed to gain momentum in the near future, market participants hold the key responsibilities to drive the development, including: • •

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Government’s policies, which are expected to open up subsidies for HEV OEMs’ participation to promote HEV through making more models available & pricing strategy

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“HEV should be the main technology to promote energy saving and emission targets in the automotive sector. Although BEV shows advantages in terms of energy saving and emission reduction, it still has a long way to go in terms of core technology and infrastructure construction. Before the maturity of China’s BEV industry, wide adoption of HEV can be an effective stepping stone to achieving the national goals.” - Vice president, China Automotive Industry Association

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HEV is believed to meet consumers’ needs in terms of cost, performance, and convenience while perceptions of BEV express lacking confidence in BEV’s technical maturity. 20

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Economical Compared to conventional vehicles, current HEV price is more suitable to the Chinese consumers, who are price sensitive. HEV also offers shorter period of time for ROI through fuel savings compared to conventional cars.

Performance HEV shows almost no difference from conventional vehicles in terms of speed and acceleration performance. Unlike BEV, HEV does not have limitation on driving distance and maximum speed.

Convenience HEV does not rely on charging stations, which is a leading inhibitor to BEV’s advancement as the number and proximity of charging stations is not sufficient. Out of 25 pilot cities, none of them meet the target in developing the amount of charging stations outlined in the initial blueprint.

Expense on purchase of HEV/PHEV/BEV vs. Conventional Vehicle

+150K

+100K

+50K

Break Even 0

5

10

15

20

25

-50K HEV

PHEV

BEV (Without Subsidy)

BEV (With Subsidy)

Calculation assumptions: oil consumption is 7 liter per hundred kilometer; Oil price in China is CNY 8 per liter; Electricity price is CNY 0.5 per kwh; time cost is excluded; annual driving distance is 15,000 kilometers; HEV shows 35% fuel-saving; subsidy for BEV CNY 60,000 from central government.

Series

BYD F3 Roewe 350 Camry Prius

Type Conventional Vehicle

HEV

Mileage (km)

Maximum Speed (km/h)

Full Charge Time *

180

-

200

-

180

-

180

-

200

-

500/100**

150

9 Hours

300

140

7 Hours

180

130

6 Hours

Depends on fuel consumption level with an average of 600 - 800

Roewe 750 BYD F3DM BYD E6 Roewe E50

PHEV BEV

* Full charge time is calculated based on slow charging mode ** HEV drive mode offer 500 km while BEV drive mode offer 100km distance limit

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OEMs have already displayed some movements in shifting towards

HEV Development.

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In order to meet the 2015 national target on fuel consumption (6.9 liter per 100km), some leading OEMS have been switching their investment & effort towards HEV as the results in their BEV product launch efforts yielded discouraging and unsustainable results.

INTERNATIONAL OEMs AND JVs Toyota established its R&D center, focusing on the development of HEV and PHEV in China since 2011, where operations have come online in 2013 with the aim to localize HEV production of it’s hallmark brand, Prius

Nissan has switched production efforts to HEV after disappointing market adoption of its BEV Leaf series; it displayed the newly launched HEV Friend-me in the 2013 Shanghai Auto Show

LOCAL OEMs BYD adjusted its strategy by expanding its R&D to develop HEV technology at the same time as its BEV development.

FAW is currently focusing on HEV technology and plans to promote its self-developed hybrid technology with the Hongqi Series in 2015.

Chang’an invested CNY 1 billion for ESV and NEV development, and declared to achieve an advance breakthrough in HEV technology

“ Toyota will pursue its investment towards HEV. We believe HEV is an effective green technology because of its obvious fuel- saving feature. Price is one of the factors to prevent HEV acceptance in China, however, with our efforts of localization, it will gain more market acceptance in the near future.” -General manager, Toyota China

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While HEV seems a safer short-term bet for OEMs, government support is still required to enable the success of the OEM’s adopting a “HEV-first” strategy in China.

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POSITIVE

“China would adjust the existing subsidy program to cope with the changing environment. For example, subsidies would vary based on the degree of a vehicle’s fuel efficiency—the better fuel-efficient a car is, the greater the subsidy. Hence, HEV should enjoy more subsidy than what it currently has” - Miao Wei, Head of the Ministry of Industry and Information Technology

“The priority for HEV development should be based on market demand. In the past few years, we did not achieve the leapfrog in the electric vehicle development through BEV as we had expected; hence, there should be a detour by enacting supportive policy towards HEV to set a clear direction of the electric vehicle development in the future.” - Song Jiang, Dean of Automobile Technology Development Institute of Tsinghua University

“We should adopt and promote different green vehicle technologies, instead of targeting only BEV. The aim of BEV development is to realize energy saving and emission reduction; hence, the government should encourage other technology such as HEV for environmental benefits as well.”  - Li Shufu, President of Geely Automobile

DOUBTFUL

“Interpreting the government actions, I presume HEV will not gain further support as BEV would remain the best suited green technology for an ultimate energy saving and emission reduction state. We may not see any switch of policy, and on the contrary, I believe that subsidy for BEV will continue and there will be more BEV purchase for governmental use.” - Xu Xingwu, Vice GM of Hefei Guoxuan Hi- Tech Power Energy Co. Ltd.

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While BEV can make China a global pioneer of EV, the government needs to incent the evolution of this industry in a logical fashion.

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2013 - 2015

2015 - 2020

After 2020

HEV to bridge the technology gap by having foreign OEMs with mature technology to play in this sector and localize its production line.

PHEV development to take place as the transition from HEV to BEV as 1st phase of infrastructure development would have been completed.

OEMs to have gained enough knowledge and experience to develop BEV technology and enter mass production.

Local OEMs to spend more effort on EV technology development through.

Consumer to gain exposure and confidence of the performance and convenience of EV as a part of the transition process.

Higher penetration of HEV in public sector.

Infrastructure to have met the requirement in terms of availability and proximity. Consumers to have gained enough exposure and confidence to boost the demand towards BEV.

“Definitely, BEV is promising and will be the future technology. However, China should also follow global trends that HEV is the necessary transitional technology for electric vehicle because it can meet consumers’ requirements better currently. However, what I believe is that BEV will witness an earlier boom in China compared to other markets in the world as government has been very persistent and supportive. As an auto and auto component maker in this industry, what they should do is focus on mastering the technology and offer a reliable electric vehicle for consumers.” -General Manager, Wanxiang Electric Vehicle Co. Ltd.

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The shift to supporting HEV development would offer opportunities to both local & foreign brands who continue to invest in China’s market despite the market penetration of EV.

OPPORTUNITIES

Electric Motor Manufacturers • •

Relatively mature technology Abundant installed capacity

Component Manufacturers Battery & Component Manufacturers • •

Large material supply Fast growing base for lithium

Public Sector - bus

Local OEMs

• •

Increasing demand of fuel-saving bus Technology fits with current demand

Public Sector - passenger vehicle

Foreign OEMs

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• •

Mature technology Established presence & reputation

SUMMARY / CONCLUSION It is undeniable that China must provide a solution to reduce its reliance on oil consumption and the transportation sector is the key sector where this needs to be accomplished. However, the high target set for its electric vehicle production repeatedly prove overly ambitious with sales results and adoption rates to be significantly lower than originally expected. Not only market is not yet ready, but market participants do not see the urge to develop the most advanced technology.To stimulate the supply and demand, an intermediate step of HEV automotive solutions should be encouraged to enable a smooth transition to the ultimate objective of BEV. The shift would bring opportunity for market participants to gain the knowledge and experience in developing EV technology while being able to generate necessary revenues for their continued investment in BEV research and development.

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