(ATF) Who Killed the Electric Car was a film released in 2006 documenting General Motor’s launch and subsequent failure to commercialise its first electric vehicle, the EV-1, in 1997. These vehicles had a cult-like following, however GM “pulled the plug” on the programme because of the internal conflict with its more lucrative internal combustion engine (ICE) vehicle business.
This lack of focus has given rise to disruptors like Tesla, which is now valued at more than the whole auto industry combined. These traditional Western auto behemoths now face an existential crisis, where any auto company that cannot transform into and compete as an electric car company may cease to survive.
For many decades, Western auto companies through their JV partnerships have dominated the Chinese auto market. Unable to compete with pure domestic products, the Chinese auto industry looked for leapfrog technologies that could also address the issues of reliance on imported oil, affordability for the rising middle class, and curbing deadly pollution.
To jumpstart the market with its regulatory tools, starting in June 2010, the Chinese government issued multiple New Energy Vehicle (NEV) incentive programs and reaffirmed their priority in its 13th Five-Year Plan. By 2019, there were already 2.58 million battery electric vehicles (BEVs) in China, compared to just 0.97 million in Europe, and 0.88 million in the USA, according to the International Energy Agency.
China also has more home and work chargers than any other part of the world, more public slow chargers than the rest of the world put together, and 82% of the global fast charger installations.
The dual credit plan renewed this year by the Ministry of Industry and Information Technology (MIIT) continues to nudge every segment of the industry forward through requirements for New Energy Vehicle credits (14% of total car production in 2021, 16% in 2022, and 18% in 2023), as well as Corporate Average Fuel Consumption (CAFC, equivalent to CAFÉ) requirements, which will also tip the scales by making ICE vehicles more expensive. This ensures Beijing meets its “Made in China 2025” targets of 25% of its 35 million vehicles to be new energy vehicles, which would be more than double the 11% forecasted global average in 2025.
Traditional Chinese auto companies, such as BAIC (HKG: 1958), BYD (OTCMKTS: BYDDF), GAC (OTCMKTS: GNZUF), Great Wall (HKG: 2333), JAC (SHA: 600418), and others, have been the earliest producers of EVs and focus on the mainstream market. The mainstream market is the most challenging to reach price parity, as ICE vehicles in this segment are highly optimized for cost and customers are extremely price sensitive. For this reason, government policies such as the NEV/CAFC regulatory schemes are carefully crafted to tilt the economics in this segment to help drive its transition to electric. Investors such as Warren Buffet have long backed BYD, and Volkswagen recently took a €1 Billion majority stake in JAC’s electric car division.
New entrants such as Li Auto (NASDAQ: LI), Nio (NYSE: NIO), Xpeng (NYSE: XPEV), and others focus on the premium luxury segment similar to Tesla, and have raised significant venture funding and listed on the US exchanges. Although a fraction of the mainstream market size, because the luxury customer segment tends to be less price sensitive and values technology, design, and experiences, these companies are first to reach price parity to their luxury ICE vehicle counterparts. Premium luxury may be defined on a relative basis, as in the US it would be the Model S (MSRP $74,990), but for China it is the Model 3 (MSRP RMB 249,900). Unlike Tesla however, Chinese companies may outsource their car and battery production, such as Nio to JAC.
In the last few months, a low-end disruption market has emerged. Most notably, China WuLing’s (JV with SAIC and GM) new Hong Guang Mini EV has quickly become the top selling EV with 15,000 deliveries in August 2020. This car starts at 28,800 RMB ($4,104) without subsidies, and this price point is enabled by a $90/kWh battery pack with intelligent Battery Management System (BMS) through their partner Octillion. Given the extensive high-speed rail coverage in China, these lower range vehicles are all that is necessary to solve local transportation needs. The enthusiasm for this car has been compared to that of the Volkswagen Beetle, the “People’s Car”.
A momentous year: battery prices plunging
Despite the negative shocks in 2020, what is often overlooked this year is the tremendous technological achievement of the EV industry to achieve price parity with ICE vehicles and cross the second chasm. For a long time, the “holy grail” of mass EV adoption would happen when the largest cost component the battery pack could reach $100/kWh, making an EV equivalent in cost to traditional ICE vehicles.
Tesla battery pack prices have fallen more than 80% this decade from $1,100/kWh in 2010 to $156/kWh in 2019, and they are expected to reach $100/kWh within the next few years. Chinese battery pack companies have already exceeded this at $80/kWh in 2020.
While Moore’s law has predicted nearly three decades of transistor scaling, Write’s Law extends this to other industries, predicting price declines in batteries as a function of cumulative production. Tesla Battery Day has shared a roadmap to $57/kWh battery packs, which should accelerate EV adoption well beyond the 28% penetration currently forecast for 2030. At that point, ICE vehicles may become uncompetitive without government subsidies.
Artificial intelligence, mobile Internet and autonomy may further impact the auto industry as the way we consume transportation. Precision controls necessary for autonomy are enabled by electrified powertrains, however the timing of the technology development, regulatory, and geopolitical issues are less certain. Chinese entrepreneurs are leveraging their EV base and instead innovating on Autonomous Mobile Robots (AMR) as a more near-term market that is a precursor to autonomous cars.
This coming decade of EVs will be the largest industrial transformation in our lifetime. The ramifications are much further reaching than the $2 trillion auto industry that exists today, as the impact will reverberate up and down the global supply chain. The oil industry for example may see 1.3 million barrels/day of demand disappear for every 100 million EVs. Given the early market lead and volume, Chinese EV companies and suppliers may be formidable challengers to the global auto industry for many decades to come.
# Alfred Chu is a Venture capitalist with over 20 years of Silicon Valley and China investment experience focused on SaaS and Electric Vehicle opportunities.