Green Cars: Could Guangdong Help China Become a Global

UNCLAS GUANGZHOU 000314 SENSITIVE SIPDIS STATE FOR EAP/CM, EEB/TRA, INR/EAP STATE PASS TO USTR CHINA OFFICE EMB BEIJING FOR DOE USDOE FOR OFFICE OF THE SECRETARY USDOE FOR INTERNATIONAL AFFAIRS USDOE FOR FOSSIL POLICY AND ENERGY E.O. 12958: N/A TAGS: EFIN ECON SENV PGOV CH SUBJECT: Green Cars: Could Guangdong Help China Become a Global Leader? REF: A) Beijing 1339; B) Beijing 0151 ¶1. (U) Summary: China has set its sights on becoming one of the world's leading producer of hybrid and pure-electric cars by 2011. Guangdong's BYD Auto Company may lead China toward that goal; it has impressive technology, a hybrid model on the market and an electric vehicle scheduled for production this year. A lack of supporting infrastructure and low levels of public enthusiasm could - likely will - hold back the growth of "green" cars domestically. However, investment from Warren Buffet and a highly popular showing at the recent Detroit Auto Show has the international community abuzz with the possibility of BYD becoming a major competitor. End Summary. -------------- BYD Shakes Up Green Car Market -------------- ¶2. (SBU) BYD Auto Company looks like it's about to take the global "green" auto sector by storm. In December 2008, BYD, based in Shenzhen, Guangdong province, began production on the world's first commercialized dual mode plug-in hybrid electric vehicle (PHEV),the F3DM, which was showcased at the 2009 North American International Auto Show in Detroit. Staying ahead of the curve, BYD also recently unveiled its pure electric concept car, the e6. According to Henry Li, General Manager of BYD Auto's Export Trade Division, the e6 has moved into the preproduction phase; and full production of the car will start this year. The firm claims the e6 consumes less than 18 kWh of power per 62 miles, and can achieve top speeds of 100 mph. Its range, more than 249 miles, is the longest in the world for its class of car; comparatively, the Nissan EV-02 (available in the U.S. in 2010) has a range of 190 miles and the Tesla Roadster has a range of 200 miles. ¶3. (U) Established in 1995, BYD Company Limited is a newcomer to the auto industry. A major player in the world battery industry, BYD has 65% and 30%, respectively, of the global markets for nickel and lithium-ion cell phone batteries. In 1996, BYD expanded its R&D to include research on the development of electric vehicle batteries. It didn't establish BYD Auto until 2000 and acquired Shaanxi Qinchuan Automobile Company, a defunct state-owned enterprise in ¶2003. In September 2008, Warren Buffett's MidAmerican Energy Holdings Co. invested USD 230 million in BYD, taking a 10% stake in the company. -------------- Moving the Industry Toward Green Vehicles -------------- ¶4. (SBU) China's gas-powered auto industry enjoyed record sales in the first-quarter of 2009 (REF. A),due in part to the Central Government's automotive stimulus plan released in March. Li told us that, in spite of this growth, there is little future potential in the development of gasoline-powered cars; automakers might hope to increase fuel efficiency by 3-5%, but beyond that the technology is simply stagnant. Li said that China's future global competitiveness would come from its ability to rapidly shift its focus to future technologies, such as biofuels, hybrids, and fully-electric vehicles (EVs). He believes China already has a head start over the United States, Japan and European automotive companies. ¶5. (SBU) BYD is looking to enter the U.S. market with its hybrid vehicles in 2010. The F6D3 dual mode model is set to hit the U.S. market in 2011. Subsequently, the e6 is expected to be released ahead of electric vehicles in preproduction by rivals Honda and Nissan. With the new investment from Warren Buffett, Li tells us, BYD hopes it has cracked the door open to smooth market entry. Wang Chuanfu, Chairman of BYD Auto, said that BYD will become China's largest automotive manufacturer by 2015, and the global leader by ¶2025. While that goal may yet prove elusive, BYD appears well positioned to vie for leadership in the global market for electric cars. Recent car sales have seen a 118% increase from last year, propelling the young automotive company from 14th to 7th in domestic auto sales. -------------- -------------- Competitive Edge: Battery Technology and Production Scheme -------------- -------------- ¶6. (U) One of the competitive advantages that BYD has is its expertise in the battery market, the key component in an electric vehicle. The e6 is powered by BYD's Fe battery, a lithium-ion battery using iron-phosphate, which is more cost efficient and chemically stable compared to conventional cobalt-based lithium-ion batteries. According to the firm, the Fe battery can be charged to 50% of its capacity in ten minutes; the remaining 50% takes hours to charge. In addition, the Fe battery maintains 80% of its initial capacity after being charged and fully discharged through 2000 cycles. The battery is likely to last 7-10 years, which eliminates the need to replace it during the normal life of the vehicle. ¶7. (SBU) The second competitive advantage that BYD has over its competition, according to Li, is its "vertical production." The firm has invested in R&D and centralized manufacturing so that the majority of its hybrid and electric car parts are produced and assembled in-house, rather than sourced from a variety of suppliers. Moreover, electric cars require much less assembly because there are few parts; the e6 model is composed of 210 parts; in contrast, a normal gas-powered car has thousands of parts; an electric motor has 30 parts, while a gas motor has 600. -------------- Challenges Facing China's Green Car Industry -------------- ¶8. (SBU) Safety, affordability, and practicality are the main challenges to the development of the electric car industry in China, according to Li. With regard to safety, Li pointed out that the general public was not altogether enthusiastic about a battery-powered car, citing recent battery explosion incidents. BYD acknowledges that it still needs to correct some of its battery-related quality control issues. On affordability, Li said that the cost of an electric car in China was not likely to fall below gas car prices in the near future. However, he commented that the cost (as was true of cell phones and computers) was likely to decrease over the long-term as technology develops further. ¶9. (SBU) Despite all of the hype surrounding the unveiling of BYD's hybrid vehicles, as of April, BYD had only sold 80 F3DM cars, according to media reports. Li blames a lack of public charging stations which has made BYD's "green" cars rather impractical for many urban consumers. While the e6 can be charged via a household plug, most urban resQents live in apartment buildings, without access to individual, outdoor outlets. In the absence of appropriate infrastructure, buyers worry about running out of electricity on the road. On the flip side, Li said charging stations would not likely spring up without public enthusiasm and a certain level of sales. According to media reports, the Central government is encouraging provincial and municipal power grids to construct charging stations. -------------- -------------- The Stimulus Plan: Central and Provincial Support -------------- -------------- ¶10. (U) The State Council's automobile stimulus plan, which covers 2009-2011, aims to achieve domestic auto sales of 10 million units by the end of 2009 (REF. A). Within this plan, the Central Government has set a target of increasing the annual production of alternative energy vehicles to 500,000 units by the end of 2011, amounting to 5% of all passenger cars produced. That would mean a twenty-fold increase from the 21,000 alternative vehicles China produced last year. In addition, the government will allocate RMB 10 billion (USD 1.4 billion) for the promotion of technology innovation over the next three years. Mindful of cost-conscious consumers and current economic conditions, the Central Government plans to further stimulate growth in the industry by subsidizing the sale of electric cars by up to 80%. ¶11. (U) According to Li, it is not clear how auto companies will further benefit from stimulus directed toward alternative energy cars. BYD currently receives a nominal tax credit for each hybrid car it sells. With regard to investment in technology innovation, Li says that obtaining government funding for private company R&D is complicated and will be easier for government-owned automotive companies such as Dongfeng Motors. As a private company, Li said that BYD should not plan its long-term development based on government support. ¶12. (U) As part of the "Guangdong Province Development Plan for Automotive Industry, 2005-2010," Guangdong aims to implement clean action vehicle programs in several cities and encourage the use of cleaner fuels and electric vehicles, according to media reports. Shenzhen will be one of 13 cities nation-wide to participate in a pilot "green car scheme" to increase the sale of alternative cars. Under the scheme, the public sector is encouraged to procure hybrid, electric, and fuel-cell vehicles relying on government subsidies of up to RMB 600,000 (USD 88,235). (Note: The cost of hybrid vehicles makes it difficult for the government to extend this incentive to private individuals. End Note.) Li tells us that much of the initial interest in BYD's hybrid vehicles has come from the public and commercial sectors. According to media reports, the City of Shenzhen and China Construction Bank have purchased the majority of BYD's F3DM models that have been sold. ¶13. (SBU) Comment: China may become a world leader in hybrid/electric car manufacturing; however, it is important to note that over 80% of China's electricity is produced by coal-fired power plants. The emissions cut by increasing the domestic fleet of hybrid and electric vehicles could be largely negated if increases in vehicle-related electricity consumption are not met with a decrease in China's reliance on fossil fuel power plants over the long-term. End Comment. GOLDBERG