China produces as many electric vehicles as the rest of the world combined, the result of aggressive government policies to boost EV demand and manufacturing.
The push to electrify is part of China’s broader effort to control air pollution in its cities, where car ownership has risen dramatically. In a concerted effort, the government has invested heavily in the development of EV technologies, established sales quotas, and offered incentives to make EVs affordable. Today, China has also become the world’s dominant maker of EV batteries, the most valuable component in any electric car, and its global automotive ambitions have grown.
John Paul MacDuffie of the Wharton School of Business takes a closer look at the ambitious environmental and industrial policies that have enabled the growth of China’s electric vehicle industry. He also discusses how China’s EV manufacturing scale, rooted in environmental policies, might upend traditional hierarchies in the global automotive industry.
Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.
China is by far the world’s largest market for electric vehicles. In the first half of 2018, Chinese drivers bought nearly 400,000 EVs more than the rest of the world combined and twice as many as the year before. At its foundation, China’s push to electrify as part of a broader effort to combat air pollution in its cities. In a concerted effort, the government has invested heavily in the development of electric vehicle technologies, established manufacturing quotas, and offered incentives to make EV’s affordable. And in the process, China has also become the world’s dominant maker of EV batteries, the most valuable component in any electric car.
On today’s podcast, we’ll take a closer look at the ambitious environmental and industrial policies driving the growth of China’s electric vehicle industry. And we’ll discuss how China’s manufacturing scale could upend traditional hierarchies in the global automotive business, with potentially far ranging economic and environmental outcomes. Today’s guest is John Paul MacDuffie, Professor at the University of Pennsylvania’s Wharton School of Business. John Paul’s also Director of the Program on Vehicle and Mobility Innovation, a global automotive research consortium. John Paul, welcome back to the podcast.
John Paul MacDuffie: Thanks. Good to be here.
Stone: You are director of the Program on Vehicle and Mobility Innovation. What is that group? And could you tell us a little bit more about your research into the global automotive industry?
McDuffie: Sure. I came to Wharton many years ago now. But having graduated from MIT, MIT had a program in the auto industry called the International Motor Vehicle program, which sponsored my dissertation and produced a book called The Machine That Changed the World, which was about the rise of Toyota Production System. I, and a bunch of other people were at MIT at that time, got jobs moved other places that IVP became a network of automotive researchers that eventually was fairly global. And I was the director of that program from Wharton, even though it was run out of MIT, for about a decade, while doing my own research.
When the founder of that program retired, I asked if we could move it to Wharton, to make life a little easier for me administratively, but also to tap some of the excitement and resources around Wharton and Penn that I was seeing. And so that’s since 2013. It’s been here. It’s at the Mac Institute for Innovation Management. It still consists of a global network of researchers, sometimes we do projects together, and sometimes we simply get together and share what we’re learning. We had a conference recently in Japan. About a year before that in London, we had a big two-day conference here at Penn, I don’t know 18 months ago. So yeah, that’s great.
Stone: So China has grown quickly in the EV space. How fast is that growth?
McDuffie: Well, I would say, I remember, maybe 2014, 2015, were the first time that China made ambitious forecasts that would make it the largest EV market in the world. And there was a lot of skepticism. Because China was still growing hugely in internal combustion engine. And they didn’t yet have all these policy pieces in place.
But sure enough, just about every year, they made their ambitious target. I think for a while they were probably selling to a lot of government agencies and the like. But I think the policy levers kind of came into focus most by sort of 2017, and fully in place by 2018. And that’s where we’re going to talk more about but it’s everything from stimulating demand through subsidies and through, you know, no license plate fees, free parking, stimulating the supply side by helping their domestic manufacturers become global leaders in EVs, dealing with the pollution problem, as you said, and a set of policies for foreign automakers that force them to participate in the huge growth of that market.
Stone: So the government is pushing the EV’s. How did the consumers feel about the EV’s generally?
McDuffie: Yeah, I mean, you know, this, of course, is part of the reason that the EV story has always this slightly schizophrenic field, because there are times when companies talk in very ambitious and excited tones about how many EVs they’re going to make, and how fast the world’s going to become electric, and that’s the future. And then consumer demand has typically been disappointing with respect to those expectations. Gas prices are low charging infrastructure has always been so available.
Stone: Even in China?
McDuffie: Well, so I think part of what we know about China is A) there have been some consumer surveys, including by some U.S. researchers I know, that show more openness and interesting curiosity about EVs among Chinese consumers than in most parts of the world. That may be because they haven’t lived with internal combustion engines for years and years. There is some history of sort of gray market electric vehicles operating in a lot of small Chinese cities, probably a minor upgrade from electric bikes, which were an upgrade from bikes and mopeds. And these may run off old lead acid batteries. But they’ve really, there’s been a huge growth in those, which don’t even get counted in the official numbers.
And so I think there’s reason to think consumers are, in general, more open and receptive. But of course, it’s the government policies, the subsidies, the investment in charging infrastructure, which has been huge. To me, one of the most intriguing things about what China is doing is this chicken and egg problem that we all talk about all the time. Nobody wants to invest in infrastructure, because it’s not enough sales, nobody wants to buy the car, because there’s not enough charging. You know, forward invest out of it, just decide to bit make the bet create so much charging infrastructure that it starts to induce demand. That’s what China is doing, and maybe what a big centralized non-democratic government can do.
Stone: So you mentioned that the manufacturers are being pushed to produce. What is their manufacturing capability for EVs in China at this point?
McDuffie: Yeah, I mean, it’s big and growing fast. A little bit of background, the Chinese government policy going back a long time now is to allow foreign automakers into China only if they create joint ventures with Chinese companies. And that was done to help the Chinese firms learn how to, you know, become part of the global auto industry. And they left the Joint Venture Partners no choice and it was a huge market that was taking off. And so many companies came in and did that some of these relationships go back for years.
Then eventually, there were some domestic Chinese automakers that were just standalone and doing their own, you know, often somewhat more innovative things. So, imagine that the first wave were in the state-owned enterprise category. And with the relationship with a joint venture partner maybe weren’t innovating a lot on their own. So, the Chinese government wanted these domestic automakers to be world players. And many people thought that certainly by now, and maybe even by five years ago, the world would be flooded with inexpensive Chinese exports. Because that’s how the Japanese, the Koreans, past countries have entered the market.
It hasn’t happened. It hasn’t happened maybe partly because the demand in China has been so great that if you can sell everything you make into a friendly nearby market, then is a little less incentive to do the more difficult thing of setting up dealerships and meeting all the regulations that are more demanding in foreign countries. But for the Chinese government, this has been really disappointing that the domestics have not become export giants.
So, I think a piece of this is thinking, EV is still a small market, it’s not a priority. It’s becoming more of a priority. But it hasn’t been an obvious priority for the big foreign automakers. Let’s push our local automakers to be the best EV makers in the world. And they’re doing it. So, I mean, Shanghai Auto, which is partnered with GM and Volkswagen in the past, they come here to Wharton every year for an executive program. And so, I see a bunch of those fairly senior folks. And you know, they’ve been saying, Hey, we’re gonna have 30 new electric vehicle models in the next few years, just watch us.
And some of them are quite advanced and are doing things with internet accessibility. Some of them are more basic, they’re maybe the biggest and they have the biggest R&D budget, but the total number of models and investment is really huge. And it’s growing quickly. And that’s what propels how rapidly it’s growing. For 2018, out of a worldwide set of electric vehicle sales of about 2 million, 1.25 were in China.
Stone: Well over half.
McDuffie: So well over half. Yeah, so and you know, well distributed over with close to 100,000, up to 200,000 for the top five makers. So, it’s not just one big firm. So, the evidence is that it’s at least paying off in terms of the domestic production. None of these are being exported yet. So that’s the ambition that has yet to be realized.
Stone: The Chinese are being very clear that they want as much local content in their electric vehicles as possible. For example, they’re requiring that all electric vehicles that receive certain subsidies have the batteries be made in China. Can you tell us more about the subsidies that they’re pushing EVs?
McDuffie: I mean, you can certainly see all of this as part of a broad policy to shift from being the world’s manufacturing base to being a source of innovation themselves. And so, you know, electric vehicles that this whole space is one that the Chinese have prioritized at the government level, including things like electric buses.
The policies on the consumer side, as we’ve discussed, are things like, you know, you can’t buy a car unless, in Shanghai and Beijing, unless you have a parking place for it. And you have to pay a lot for a parking space, but you get a free parking space, you get free licenses, you get a bunch of goodies.
Stone: With EVs?
McDuffie: Yes, only with the EVs. This is the way that a country like Norway has also really jumpstarted the consumer side of EV acceptance. And then as you point out on the producer side, they’re going to require that the foreign automakers, the ones who are already there, which is most of the world and who aren’t there yet, are making a certain percentage of electric vehicles in China. Many of those will be in these joint venture plants.
And lately, this push to have the batteries having to be sourced in China as well. So I’m sure we’ll talk about this. But China also zoomed past Japan and Korea to become the world’s biggest battery maker, as of about 2016. And that continues and if, right now, most of the Chinese made batteries go into Chinese made EV’s. If you look in detail at where did the Koreans get their batteries? Where did the Germans get their batteries? Where the Japanese and Americans they get it? All from Japanese and South Korean firms.
So, nobody’s yet buying the Chinese batteries, but they’ve got the scale, they may have the price advantage, that’s certainly going to have an influence. And if you have to use a Chinese built battery, then the Japanese and Korean firms that want to stay in that market are going to have to build their own factories. I mean, we’ve seen that before. And that doesn’t automatically give, it gives manufacturing employment to the host country, it doesn’t automatically give competitive advantage in the technology. You know, when we had those kinds of incentives that brought the Japanese here and then the Koreans and then the Germans to build factories here. The competition was good for the U.S. auto industry. But it didn’t really weaken the companies who came here they mastered some really valuable skills as well by coming here.
So, I think you know, who wins the Chinese and world EV market when most EVs and batteries are being made in China? It could still be non-Chinese firms. We already know Chinese consumers often prefer the foreign brand to the domestic brand. Two vehicles almost identical made in the same factory different badges. They’ll pay the higher price for the cachet and the brand power and things like that. That could happen with EVs too. But still to create the market, to have the demand there, means probably every automaker in the world is going to be bringing their best new EV ideas to China first. And that’s an undeniable advantage that the Chinese government creates by working both the supply and demand side so skillfully.
Stone: So the foreign manufacturers also benefit from the experience of having to play in the Chinese market, introduce vehicles for that market. Obviously, as you said, they’ve got the brand cachet that potentially could defend their market share globally as well. But I wanted to go more deeply into the battery issue for just a moment.
Stone: There was a, I guess it was July of 2018, the United Auto Workers Trade Union testified to the U.S. Commerce Department that by the year 2021. And this was I guess, their projections. By the year 2021, 56% of lithium ion battery manufacturer for electric cars would be taking place in China. Batteries are kind of the engine, not the engine they’re obviously the fuel storage, but they’re the most valuable component of an EV.
Stone: We’re talking about replacing engines made in Detroit or in Wolfsburg. With we have batteries made in China. That’s a potential for a big value leaving the established manufacturers to China. Is that a threat?
McDuffie: Yeah, I think a lot of that is true. There’s also some aspects of it worth unpacking a bit. Engine plant production in the U.S. or Europe or Japan, any of the advanced countries, is now one of the most automated of all manufacturing. So, the number of jobs at engine plants is not as big as you might think. Most of the automotive employment is still at assembly plants and doing assembly tasks.
Battery manufacturing actually can have some relatively manual portions depending on how much you want to automate. So, and that may be true in some of the Chinese plants. One of the things that I’m interested in is the question of how much batteries, in fact, become a commodity. So, huge growth we know in China. The Chinese makers have the volume, they have the scale, presumably they have the price advantage. As I mentioned, none of the developed country producers in Japan, Korea, Europe in the U.S. are using those batteries yet.
One view is that there’s actually some real value that comes in the collaboration between an automaker and a battery maker. The cells are probably the most commodity like thing where scale benefits. The way you put cells together in a battery pack, the way you put packs together in a full battery, the way you manage the heat, the way you manage the energy density, the way you manage the charging can all have a big, big impact on how efficiently you use a battery, how long its life is. And, you know, Tesla has worked with Panasonic, from the very beginning, Toyota has worked with Panasonic, the Koreans work with LG Chem and Samsung batteries. So, and there’s a lot of patenting going on in that area. So, and you know, solid state batteries are coming.
So, we may end up with a world in which there’s a more commodity like battery world that the Chinese industry dominates. There could be a higher tech, more advanced, collaborative part of the battery world that these other firms still do quite well in. And then the interesting variable is going to be the Chinese policy that you have to make your batteries in China. Because if BMW has a Chinese factory and they have a very high end battery design and they’re used to working with, you know, collaborative, maybe they’ll bring their Korean partner and have a plant there. But then it’s with Chinese workers and Chinese engineers.
So as things globalize, you get these really interesting competitive dynamics, and also interesting questions of how does the knowledge transfer and what advantage does it give? But, you know, I think the biggest thing that all of these efforts by China, so on the vehicle side, and on the battery side, is to maybe accelerate reaching a tipping point with the EVs that we’ve been waiting for a long time. And where it’s almost like you have to have the resolve but also the ability to manipulate industrial policy, as well as you know, competitive policies. So, you get the supply side going, you get the infrastructure investment going, you get the battery and the vehicle production part going, all in the same time period, and all at the same kind of accelerated pace. And then suddenly, it’s a reality that nobody can avoid and the rest of the world does it to play catch up. So I think that’s really the big significance of all the stuff in China.
Stone: One of the advantages that the Chinese were supposed to have in making lithium ion batteries is that they have a lock, or they had, at one point, a near lock on the supply of rare earth metals, which are used in these batteries.
Stone: And that was supposed to give them an unfair advantage in this market. That was several years ago. Has that played out?
McDuffie: I mean, there’s a few different developments there. One thing that would confirm some of the fears about you know, the dynamics around this scarce resource is that neodymium, which is one of the most used and most expensive of these, a lot of it’s in China and China has been cutting back on what they allow to be exported. And it seems almost certain that they want to keep it for their own their own manufacturers. So, that would play into all of those kinds of concerns.
I read, just over the last six months or so, two or three announcements from big foreign automakers. BMW said we have new designs for our motors and batteries that will require zero rare earths in the next generation. So, they’re like, they’ve been one of the most worried about it. And they’re like, we’re just not going to be dependent. Toyota announced that they could reduce their use of this neodymium by 50%. Two other relatively expensive ones, terbium and dysprosium, that they could eliminate to zero. And then there’s some others that are just like lanthanum and cesium.
Stone: Haha pronouncing these is a challenge.
McDuffie: Sorry, I’m looking at my notes here. I’m not a deep knowledge. But anyway, there’s some that are abundant, and cheap and Toyota is switching to using them. So, I guess you might say technological advance, technology innovation, is helping to deal with this rare earths shortage problem. So, I guess I don’t think it’s so like the fact that these announcements are coming quickly for multiple people makes me thinks it won’t end up being the bottleneck we thought.
Stone: Could you compare Chinese EV policy with what we’re seeing in United States or even in Europe? China seems like it’s very top down.
McDuffie: Well, that’s true. And Europe, you know, had probably what happens to the EU level is still one of the dominant aspects, mostly because of, you know, increased requirements for reducing emissions and improving fuel efficiencies. So each time you get to, you know, EU4, EU5, EU6, then the manufacturers have to use more EVs in their mix or more, you know, other kinds of hybrids or other kinds of things.
Norway is an interesting example, idiosyncratic, a lot of North Sea oil money, which they’re deliberately using to help make the vehicles all electric. But about 40% of new vehicle sales in Norway are electric now, about 10% of total installed cars. And again, as I say, they’ve done it with dedicated lanes, free parking, free licensing, subsidies to the purchase price, and the like. So, there’s still room for individual countries to have a big impact.
In the US, of course, right now, we’re seeing a big step away from pushing some of the environmentally sensitive or friendly policies back to something that’s that that is much more friendly to, you know, traditional petroleum industries, traditional approaches to combustion. And that has a ripple effect. You know, states have had different subsidies and policies for EVs here. But if the national mood changes, it makes it a little harder to sustain.
My favorite example is in Georgia. Georgia had the highest EV sales in the U.S., more than California, because they introduced a $5,000 state subsidy in addition to the federal $7,500. And the Nissan LEAF, for example, which may still be the biggest selling electric vehicle ever, because it’s been a single model since 2013, was the main beneficiary of that. Not, you know, a $30,000 car. So that’s a pretty big chunk when you add those subsidies together. So that was going on. It became a political football in the Georgia legislature and the Republican majority passed a law removing the subsidy. And to add insult to injury charging electric vehicle owners $250 a year to make up for the gasoline taxes they weren’t paying because they weren’t buying gasoline.
Stone: And this is retroactive after, not retroactive, but this comes after you’ve invested in the in the LEAF?
McDuffie: Yes, exactly. And, and so new sales of electric vehicles went well, basically to zero. I saw the Nissan guy who was responsible for that part of the country. And he was like, I hope my bosses changed my targets because otherwise my bonuses cooked. So, you know, there’s these pendulum swings that can happen very quickly, particularly at the more local level. So for U.S. states and probably for countries, but very influenced by the more, you know, the larger regional and regulatory regime dynamics.
Stone: Okay, so I want to take another look at that or deeper look at that. Are Chinese EV policies going to push vehicle electrification globally in a way that’s analogous to California setting the pace for electrification in the U.S.? How important will China be in pushing for the global EV market?
McDuffie: Well, I mean, absolutely in the way that we’ve already discussed, which is all these foreign manufacturers going to China to make vehicles that they can sell in that market and the likelihood that that’s a bigger investment and that those are vehicles that they’re going to export. So, we have the question of whether there’s soon a bunch of successful Chinese EV exports that would increase their influence. Certainly.
I mean, I think, of course, what California is able to do under the Clean Air Act, is set a different standard, as long as it’s a more aggressive and environmentally friendly one. And then other states can choose either the federal standard or the California standard. So legally, California can be a bellwether that other states sign up for, and then that’s their law.
I can’t think of anything quite comparable to that in in China. And I will add a couple of cautionary notes. I mean, the closer people are to studying how government policy works in China, the more they’ll tell you that this idea that central government snaps their fingers and everything just happens is completely a myth. Because you have very strong regional governments, you have very strong city governments, they all have their own power dynamics. They all have a certain amount of conflict, as well as aligning goals. Sometimes the growth goals for general economic growth, in many of these areas have meant a massive investment in, for example, coal plants for electricity, often dirty coal plants.
And I know one scholar at MIT who says, you know, all those EVs in China, if they used clean ICEs, the wellhead to barrel to road, total environmental impact might actually be better than if all the electricity is coming from dirty coal plants. So sometimes the push for the traditional ways in which they’ve grown their economy is going to fight with some of these innovation policies.
So that’s one possibility, simply, you know, not as much command and control as we imagine. And the Chinese economy looks like it’s slowing down. And that is going to be new for China. And it’s possible that some of these ambitious goals they back away from because other things take priority, or they’re worried about something else. So, you know, we have to see. We’ve seen a consistency in this both announced policies, and then the actual policies, and acceleration in the pace has been kind of breathtaking. It doesn’t automatically mean it stays like that.
Stone: Let me ask you one final question here if I may. A decade ago when I was a journalist, I did a story on a man named Miles Reuben, who had developed a, he put together a car company in Los Angeles, and they were importing Chinese sedans that they were putting batteries in and they wanted to have that be the first highway speed capable EV in America. This was around 2008-2009. And the whole drama was he was going be the first one to do it, you know, a mass market kind of car, not the Tesla Roadster that was very expensive at that point. And that first car was going to be Chinese, kind of two things at once. Well, here we are a decade later. Yeah. Are we going to see Chinese EVs on American roads at some point?
McDuffie: I mean, I would be very surprised if we don’t. But the time frame for that. I mean, I would have told you that we’d have cheap, you know, internal combustion Chinese cars on the road by now. I mean, even with all of the foreign manufacturers in China, I believe there’s one Buick model made in China that sold in the U.S. And you know, again, demand has been so high and growing so fast in China, if you can sell them all in China, then there’s not as much reason to do it.
But eventually, I think all these investments are going to be greater than just the domestic Chinese demand. Certainly, the Chinese government wants it to be, become an export powerhouse. And, again, if we add to that, maybe this isn’t quite what you meant. EVs made in China, but possibly by foreign manufacturers being exported. I think once you add that it’s a certainty. Although again, the timeframe has to be guessed at
Stone: John Paul, thanks for talking.
McDuffie: Sure. My pleasure.
Stone: Today’s guest has been John Paul McDuffie, professor at the Wharton School of Business and director of the Program on Vehicle and Mobility Innovation. For more energy policy insights, visit the archive of past episodes of energy policy now on the Kleinman Center’s website. Our web address is kleinmanenergy.upenn.edu. And keep up with the latest research and events from the Kleinman Center by visiting us on Twitter. our Twitter feed is @kleinmanenergy. Thanks for listening to Energy Policy Now and have a great day.