China's Massive Auto Market May Not Be an Electric-Car Paradise

Everyone expects China to be the car market of the future. At almost 14 million vehicles sold in 2010, it's already larger than the current U.S. market. But Wang Dazong, president of Beijing Automotive Industry Holding, said last week that he expects it to go to -- wait for it -- 40 million annually by 2020. Folks are taking that mind-boggling number seriously, but there's still a big question mark: How much of that will be electric?
It's an important question because, at 40 million vehicles a year, Chinese sales would be more than double the 17.4 million the U.S. market achieved at its peak in 2005. Add to this the burgeoning auto markets in the rest of the developed world and you have an environmentalist's nightmare: tens of millions of new cars each year, with perhaps only 10 to 15 percent running on electricity alone.
Going electric is a numbers game
China is supposedly pursuing an aggressive electrification agenda with the goal of making itself a world leader in batteries and EVs while offsetting its future greenhouse-gas liabilities. This has freaked out many in the U.S. who, for instance, worry that we'll someday be as dependent on Asian EV batteries as we have been on Middle Eastern oil.

It's true that Chinese carmakers are all getting into the electric game -- partly thanks to government command-and-control mandates, partly because the business opportunity is huge. Spreading manufacturing costs over a potentially gigantic domestic market could set these companies up to become dominant global exporters -- although to be honest, if you have 40 million customers at home, you don't really need to export that much.

But electric cars are in their infancy, and they're still relatively costly. Meanwhile, good old internal combustion technology, when combined with cheap Chinese manufacturing, will provide mass mobility at the kinds of prices that will enable carmakers to make huge amounts of money off that huge Chinese market.

So EVs can't be a big part of the vehicle mix if the Chinese auto market is to grow as quickly as everyone expects. At least, not unless the Chinese government heavily subsidizes no-emission vehicles -- as it probably could. Whether it actually will is anyone's guess at this point.

Gold rush for global auto giants
Don't forget that the automotive big boys aren't just going to let the Chinese have their market all to themselves. General Motors has bled billions keeping Buick -- and its aging demographic -- afloat in the U.S. specifically because the brand is the key to accessing the Chinese luxury buyer.

Joint ventures abound. So while carmakers such as Mercedes-Benz and Hyundai may be keeping tabs on China's EV potential, what they really want to do is leverage the Chinese market to elevate their profit margins with conventional autos and escape the kind of market decline and saturation they're seeing closer to home.

Reality check

If a market of 40 million by 2020 will only be 10 percent electric, China has a challenge, and one that might not go down so well with its exploding middle class: drastically curtail emissions and improve fuel efficiency for new cars and trucks. This is basically a formula for small cars, as advanced engine technology is simply going to be too expensive for most consumers and would crush automaker profits to boot.

That's not going to sit well with newly affluent customers who equate a first-world lifestyle with a big sedan or an SUV. China's enviable growth rate may never translate into the kind of spending, rather than old-school savings, that some economists hope for.

But there will definitely be a chunk of the population that wants to express its success through consumption. And these drivers won't want to be subjected to limits on how far they can drive on a single EV charge, or what kind of style they ultimately roll in.

So there's a major problem on the horizon, driven by a market that not only can't be stopped, but that's going to be bigger than we've ever seen.

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