Skepticism surrounds China EV boom

BEIJING -- Song Yayun, a mild-mannered professor of ancient Chinese literature, counts himself lucky for living no higher than the second floor of his Beijing apartment building.

It's just low enough for him to string an extension cord out his window to the parking lot below so he can recharge the white, five-door BAIC-brand electric vehicle he bought last year, a car he is not particularly thrilled with.

No one said electrifying China's auto market would be easy.

But even as automakers flood the Chinese market with new eco-models and the government pushes generous incentives, there remains much skepticism about the country's ballyhooed EV boom.

Sales of pure EVs and plug-in hybrids in China more than quadrupled last year to 331,092 vehicles, making the world's biggest car market also the biggest market for electrified vehicles.

Yet there is a split personality in Chinese demand, as well as much uncertainty.

Virtually all EV sales are spurred by government subsidies or perks, such as exceptions from the lotteries for license plates in big cities. And the vehicles Chinese consumers are clamoring for right now are no different from what U.S. consumers are buying: fuel-thirsty crossovers, which account for about one in three passenger vehicles sold here.

Consumers may not be enthused about electrified vehicles, but few customers or carmakers can afford to ignore them.

At the Beijing auto show last week, 147 electric and plug-in hybrid vehicles were on display.

With massive pollution problems and scant domestic oil reserves, China has made going electric a top priority. The government is encouraging green cars with subsidies of up to $8,475 per vehicle. It requires foreign automakers to develop those cars with their Chinese joint-venture partners. And carmakers are rushing out electrified cars to meet China's tough fleet fuel economy target of about 47 mpg in 2020.

"Without any doubt, EV development is going to be driven by regulation," Nissan Motor Co. CEO Carlos Ghosn, a pioneering proponent of electric vehicles, said at the Beijing show.

"The consumer is not ready to jump into EVs," he said.

Certainly professor Song wouldn't have taken the plunge without incentives. He opted for an EV simply because it was the fastest way to get behind the wheel. Going green allowed him to bypass Beijing's ultracompetitive license plate lottery, a roll of the dice for ordinary consumers that could delay car ownership for years.

Song typifies China's new breed of EV driver. He is a first-time owner who picked a relatively cheap China-brand EV. After subsidies, he paid about $18,012 for his EV200 hatchback made by Beijing Automotive Industry Co. It has a range of 200 kilometers, or about 124 miles. But Song has never driven it farther than 20 miles from his apartment.

His apartment block, like most others in China, has no EV charging port. When not charging through his window, he uses an eight-car charging station at Peking University, where he teaches.

During the frigid northern China winter, the car's listed range drops by half as its lithium ion battery struggles against the cold. In Beijing's sweltering summer, Song rarely turns on the air conditioning because that also drains the battery too fast.

Song says the car's silent driving is a hazard and recounts the time he sideswiped a student on campus who never heard him coming.

Chinese EVs aren't equipped with the artificial humming noise used in Japan and the U.S. to alert pedestrians.

And then there are the slightly unnerving urban legends that Song says still circulate in China about the newfangled technology.

"Some people say there is radiation from the battery, but I'm not sure if that's true," Song said. "I'm worried."

Without incentives, it's unclear how EVs would win traction at all.

Pure EVs and plug-in hybrid vehicles are lumped together in China as "new energy vehicles," or NEVs.

NEV subsidies apply to pure electric vehicles and plug-in hybrids produced in China but not to conventional hybrids such as the Toyota Prius. And to qualify, plug-in hybrids must be able to travel 50 kilometers (31 miles) in EV mode.

But the future of the all-important subsidies is as hazy as Beijing's polluted skyline amid growing concern that the country's burgeoning EV market may be rife with subsidy fraud.

The government is investigating reports that two sellers of electric buses doctored invoices to inflate their EV subsidies. In one case, a company called Suzhou King Long claimed to have sold 12,003 electric buses last year, an improbable sixfold year-on-year sales increase. Amid recriminations, a general manager at the company jumped to his death. Local media portrayed the suicide as an admission of guilt, though the company denied any wrongdoing.

Claims of fraud could trigger a rethinking of how China handles the handouts, possibly damping automakers' EV rollout plans.

The government already has spent approximately $4.6 billion on NEV subsidies, and as much as 10 percent was funneled to unqualified applicants, according to local media accounts.

"The appetite to spend that kind of money will dissipate pretty soon," said James Chao, Asia-Pacific managing director at IHS Automotive. "As an EV maker, you really have to watch for what the government does next. You could be spending a lot of money on these things and end up with vehicles that don't sell."

President Xi Jinping wants 5 million NEVs on the roads by 2020 -- after that, the government could start phasing out subsidies.

Yet even with incentives, China's target is a tall order.

IHS Automotive forecasts EV and plug-in hybrid passenger vehicle sales in China of 1.29 million vehicles in 2020. That would be more than twice the 511,900 forecast for U.S. segment sales that year but still far short of the government's lofty goal.

Meanwhile, carmakers are scrambling to comply with China's emissions standards and cash in on incentives while they last.

Volkswagen Group is among the most aggressive. VW believes China's NEV market will climb to around 2 million vehicles in 2020 and aims to sell "several hundreds of thousands" of NEVs annually around then, says Jochem Heizmann, CEO of Volkswagen Group China.

To get there, VW will roll out 15 NEVs through the end of the decade.

The campaign will begin with locally produced plug-in hybrids and then shift into China-made EVs. Around 2020, things will really take off when VW introduces a new modular platform called MEB that is specifically designed for global EVs, Heizmann says.

"To fulfill the fuel consumption targets, you would either have to sell only small cars and no more SUVs, or you have to include NEVs in your fleet," he said. "The next phase is starting."

Ford Motor Co. wants 10 to 25 percent of its model mix in China to be electrified by 2020, Ford China CEO John Lawler says.

Ford will kick off its push by launching a hybrid Mondeo sedan this year. It will follow with the C-Max Energi plug-in hybrid in early 2017.

"Access to license plates and incentives is going to drive growth," Lawler said. "That's the intention of the policy."

Even Toyota Motor Corp., a longtime EV skeptic, is reconsidering its options in China. The Japanese carmaker says China's fuel economy regulations will make it tougher for the company to reach its China sales goal of 2 million vehicles by around 2025.

The rules are forcing Toyota to deviate from its product strategy centered around conventional hybrids, which don't qualify for NEV credits. Instead, it announced in Beijing that in 2018, it will launch two made-in-China plug-in hybrids -- Toyota's first.

Hiroji Onishi, head of Toyota's China operations, said during the show that the company eventually will have to introduce an EV as well.

Onishi said it would be premature for China to kill subsidies in 2020 and offered the suggestion that they should be extended until around 2025.

"We hope it will last a little longer," Onishi said in Beijing. "We are finally seeing some momentum."

Price remains the key pivot point. Most Chinese EV buyers snap up cheap local brands, rather than the Tesla Model S or a BMW i3. Even the more modestly priced Nissan Leaf is having trouble competing here.

Nissan's Ghosn bemoans the cut-rate domestic competition, which handily outsell the Leaf, rebadged and sold here as the Venucia e30. Venucia is the domestic entry brand created under Dongfeng Nissan Passenger Vehicle Co., the Japanese carmaker's local joint venture with Dongfeng Motor Co.

"We are disappointed," Ghosn said in Beijing. "For the moment, we have neither sales nor profits on electric cars. ... In China, we brought the car, but we're not selling it."

What is selling, Ghosn said, are low-spec runabouts like Song's uninspiring subcompact BAIC. Local rivals cost 25 percent less than the Leaf and still match or exceed it on range, Ghosn said.

One of the purveyors is BYD Co., a local EV leader that counts Berkshire Hathaway Inc.'s Warren Buffett as a major investor.

BYD says it aims to sell 150,000 NEVs this year, more than double the 61,700 units it delivered in 2015.

The locally built Kandi Panda, a microelectric car, was the top-selling nameplate last year with sales of 20,390, according to d1EV.com, a Chinese website covering the domestic EV industry. Nissan, by contrast, sold only 1,200 Venucia e30s.

Disappointing sales of the Venucia e30 led to the resignation of brand chief Ye Lei last year.

Sophie Shen, a senior manager at PwC Autofacts, says BYD has actually been profitable selling EVs with subsidies.

"BYD's capability of selling volume NEV models and supplying others with EV batteries has already gained itself a good position in the competition," Shen said.

Ghosn is working on a two-prong parry: Nissan will improve the performance and range of an upper-tier EV such as the e30/Leaf. But it also will develop a low-cost, low-spec EV for the masses.

Ghosn didn't give a timeline for the low-end rollout.

"What's really evolving are the cheap electric cars," he said. "To be a big player in the Chinese market, we need both offers."

But can foreign players build them cheaply enough?

Song says he plans to buy another car in around four years, when his current car's battery is expected to wear out. And that car is virtually guaranteed to be another EV, since his license plate registration shoehorns him into the EV track.

But aside from seeking better range and faster charging time, Song says he also will be looking for a better deal.

"At the moment, electricity is cheap," Song said. "But even after subsidies, I think EVs are too expensive."