Who Will Shape the Future of China’s Auto Market?

The outlook for the future of Chinese automobiles is becoming increasingly uncertain. Rather than conventional internal combustion vehicles, where it is difficult to narrow the technology gap with global companies, the Chinese government is trying to reorganize the auto market around electric vehicles that use secondary batteries. Accordingly, over the past four to five years it has implemented policies restricting the purchase of internal combustion vehicles. By contrast, support for domestic companies’ electric vehicles has been extensive. Can China’s automobile market really be transformed, as the government intends, into one led by electric vehicles?

As domestic demand expanded through economic growth, automobile sales in China also rose sharply. China has been the world’s No. 1 market for more than a decade. As a result, global automakers have made large-scale investments there.

At present, China has production facilities capable of manufacturing 43 million vehicles. However, amid the economic slowdown, passenger car sales in China fell to 22.72 million in 2018, down 6.0% from the previous year. The problem of excess production capacity has become a major burden for automakers. Production in 2019 is expected to remain at around 29 million units. Policy changes aimed at artificially reshaping market order have thrown global companies that invested in China into great confusion.

As the contraction of China’s auto market deepens, it is questionable whether policies that heavily support electric vehicles can really be sustained. The competitiveness of internal combustion vehicles is overwhelmingly greater than that of electric vehicles. Not only in efficiency but also in price competitiveness, the two are hardly comparable. This is why there is growing skepticism about continuing to provide enormous subsidies to inefficient electric vehicles while production facilities for internal combustion vehicles are already excessive.

Chinese officials also recognize the limitations of electric vehicles. They have acknowledged these limits even in terms of environmental friendliness. When the process of generating electricity for charging is taken into account, electric vehicles cannot necessarily be regarded as more environmentally friendly. Moreover, the very high cost of disposing of electric vehicle batteries is emerging as a future challenge. Abandoned batteries can themselves become a source of environmental pollution. More than 1.2 million electric vehicles were sold in 2018 alone. Yet there is no plan for dealing with batteries once they reach the end of their lifespan.

Can China’s dream—its “Chinese Dream”—of turning the future of automobiles toward electric vehicles while turning away from internal combustion vehicles, which play the central role in the auto market, really become reality? Thanks to subsidies, electric vehicles account for more than 6% of China’s automobile market. The giveaway-driven growth strategy that created such a high share now appears to have reached its limit. Electric vehicle subsidies are gradually being reduced and are expected to be halted in 2020. China’s push for electric vehicle ascendancy also appears likely to shrink along with the reduction in subsidies.

Optimistic views about the future of electric vehicles have also appeared in advanced countries. Tesla in the United States was one such case, building expectations while relying on government regulation and protection. Although it is difficult for the company to sustain its business without government support, it drew attention because it was seen as future-oriented. Chinese electric vehicle company NIO also recorded explosive gains after listing on the U.S. stock market.

But the future of automobiles is unlikely to be determined by the hopes of governments and intellectuals. A market can remain healthy only when demand is sustained by consumer choice. In the long run, markets and companies can endure only when they are grounded in consumers’ rational decisions.

Attempts by governments to decide on behalf of consumers, and to compel and control consumer choice through regulation, are unlikely to last long. They may create a temporary boom, but a social choice that ignores cost and efficiency is highly likely to end as a grand experiment.

The government should not turn the automobile market into a laboratory. The idea that the government can decide products on behalf of producers and set prices on their behalf to create the market it wants will only distort the market.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 중국 자동차 시장의 미래는 누가 결정할까?

Author: Sung-no Choi

Date: 2019-02-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=11437