Electric Buses are the Key to Green Economy – But the Market Needs Support
COVID-19 and China
Green Energy. Image credit: Pixabay

China’s phenomenal economic growth has led to some complications: the growing Gross Domestic Product (GDP) – boosted at almost any cost year-on-year – has led in particular to environmental challenges, with socioeconomic consequences not only for China but also for the rest of the world.

Besides the rapid economic growth, the transformation of Chinese society and the recent global slowdown of the world economy after the 2008 financial crisis have all added to the current environmental quandary. For instance, after the 2008 crisis, in order not to let growth slow, China tried to lift its domestic consumption and implement massive infrastructure construction. In addition, urbanization and a trend towards smaller households increased overall energy consumption.

Yet there is still hope. As Chinese authorities are taking the combat against climate change seriously, following the publication of the 2030 Sustainable Development Goals (SDG).

The transition to alternative energy sources and a low carbon economy is one of the critical goals of SDGs. The transportation sector is responsible for 23% of global energy-related greenhouse gas (GHG) emissions and is expected to more than double by 2050 in the 'business as usual' (BAU) scenario faster than other energy end-use sectors.

Therefore, electric mobility has drawn substantial attention from all over the world in recent years. The electrification of transportation offers an attractive approach to reducing GHG emissions and potentially decreasing total energy consumption as well as providing a new market to explore.

Although personal Electric Vehicles (EVs) get the most attention from the market as the hope for a green economy, they are not as successful as electric busses in terms of reducing GHG. According to Bloomberg's study, by the end of 2020, electric buses will displace 270,000 barrels a day of diesel fuel – three times the amount of gasoline replaced by personal electric vehicles worldwide.

Compared to other countries, the Chinese government has made a concerted effort to promote electric buses in the country's biggest cities. One of its main goals is lowering the country's debilitating air pollution. The efforts have included direct and indirect subsidies.

The state spent RMB 393 billion (USD 57.7 billion) turbocharging the development of electric batteries and related technologies between 2009-17, estimated by the US think-tank the Center for Strategic and International Studies.

Currently, diesel buses have been replaced entirely by electric buses in Shenzhen. There are 16,359 electric buses in service in and around the city  –  more electric buses than there are in New York, Los Angeles, New Jersey, Chicago, and Toronto combined.

However, the government's recent decision to apply subsidy cuts on electric busses threatens the full electrification of the fleet in China's biggest cities such as Beijing, Shanghai and Tianjin. Electric buses cost 2 to 4 times more upfront than conventional diesel buses. To illustrate, in the US an electric bus averages around USD 750,000, while a traditional diesel bus is around USD 435,000.

They need the infrastructure to support consistent charging. Their batteries need to be replaced at least once during their lifetime, which is costly.

Behind this decision lies the government's belief that market demand will increase in an amount that will raise the prices; price rises should then compensate for the subsidy cuts.

However, the subsidy cuts seem like an early move regarding the urgency of climate change. It takes more time for market forces to bring demand and supply into equilibrium. Considering Chinese people are not so sensitive to the environmental benefits of the products, subsidies are crucial to success. It would have been faster with extended government support, especially in a country like China, with a strong central authority.

Has China's EV industry indeed turned competitive enough to be successful without the subsidies?

It is crucial to investigate the market competition among manufacturers and ask whether it might balance the subsidy cuts.

Since the implementation of subsidies, Shenzhen-based EV manufacturer Build Your Dreams (BYD) have been the primary receivers of government support. According to Quartz's research, BYD received around USD 1 billion in subsidies in 2016.

In 2018, BYD broke sales records for five months straight and became the second-largest manufacturer of EVs in China, with close to 30,000 units sold in December.

The avenue leading to the company's headquarters, in Shenzhen's Pingshan district, bears the company's name and is lined with solar-powered streetlamps, also manufactured by BYD.

"The sun gives humanity a second chance," claim the subtitles in a promotional video played to all visiting media that portrays the company as “an example of sustainability.”

BYD says it believes the future lies in the combination of renewable energies, energy storage technology (such as batteries) and electric vehicles. Furthermore, the company's idea of urban mobility is three-tiered: an under­ground rail system, electric surface transportation and elevated monorail networks – for which latter element it has developed SkyRail, a medium-density, fully integrated, driverless, straddle-type system.

Although BYD seems like a very dominant actor in the market, the company actually has many competitors, including Zhengzhou Yutong Bus, Wuzhoulong Motors, Thunder-Sky Energy Group… and the biggest competitor, BAIC BJEV.

BAIC BJEV – Beijing Electric Vehicle – is an electric vehicle unit of Beijing Automotive Group. The company was founded in 2009 by BAIC as a development platform for New Energy Vehicles. The main business segment in China comprises research and development, production, sales and services for New Energy Vehicles (NEV) and NEV core components. In March 2018 Daimler acquired 3.93 percent of BAIC. Additionally, as was announced in July 2019, BAIC acquired a five percent stake in Daimler.

As an addition to buses, the company also produces electric vans, which differentiates them from competitors.

At the same time, China's previous EV push also attracted global players. "You already see that response with companies like Volkswagen, BMW and others agreeing to source batteries in China, for example, or even starting to think about using China as their lead market for the development of EVs," said Willy C. Shih,  a professor of management practice in business administration at Harvard Business School.

Moreover, Hyundai and Kia are also players in China's EV market. As global automakers seek to expand in the PRC, the competition among Chinese electric vehicle manufacturers is rising. Almost 500 manufacturers have registered to make EVs in China; together they are set to take the total manufacturing capacity up to 3.9 million vehicles annually, or about three times current sales levels, according to CleanTechnica.

It seems like competition is high in China's EV market. However, most of these companies are specializing in producing electric cars rather than electric buses. When it comes to manufacturing electric buses, the competition is somewhat limited – mainly to producers in Shenzhen, Shanghai and Beijing.

In the absence of government subsidies, it seems like there will not be fierce competition in producing electric busses. Investors might therefore benefit from the initially low competition in the electric bus market as the demand will likely increase in the near future. Electric buses hold more appeal when it comes to reducing GHG and demand is likely to swell globally.

Editor: Luke Sheehan

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