The 2012 Beijing Auto Show marks two big trends: First, China has already overtaken the US as the world’s largest auto market. Second, hybrid and electric cars have gained increasing importance.
These two trends are nurtured by the Chinese government’s policy for economic and social development. In the current plan for 2011-15, seven strategic industries are to receive national priority: information technology, environmental protection, new energy, biology, high-end equipment manufacturing, new materials, and new-energy cars. Despite the private nature of auto consumption, the Chinese government has seized the initiative to push for new-energy cars. What makes new-energy cars so strategic to warrant national priority?
The Chinese policy greatly contrasts with that of the US that leaves the initiative to the private sector. Looking back, the half-heartedness of the American auto industry represents the road not taken from the first oil crisis of 1973. Since then, Japanese cars emphasizing fuel efficiency and quality have captured about 53% of the US market from near zero. This onslaught of imports culminated in the bankruptcy of General Motors and Chrysler in 2009. The loss of the American auto market to Japan is a real strategic loss in terms of employment, technical know-how, consumer benefits, and national prestige. The automobile carries deep implications because transportation accounts for more than 60% of oil consumption in the world, and an even higher 70% in the US. For the US to wean itself from dependency on foreign oil, the car industry should be the first place to start, but little has been done by the American automakers over four decades.
The next strategic battle has already begun, but this time it’s not about fuel efficiency. The reason is that only very limited fuel savings can be further squeezed out of the gasoline engine. To achieve a breakthrough, replacing the gasoline engine is the next logical step to take oil entirely out of the equation. Again, American complacency has ceded hybrid technology to Toyota, and electric propulsion technology to Nissan, which were first to introduce commercial models of new-energy cars such as the Prius and the Leaf respectively. In the new technologies of today, if a company fails to lead, it is destined to play catch-up all the time.
How long will it take for the electrification of the automobile? If you look at the train, electrification has taken two decades to complete in Japan and Europe, and is currently proceeding with quickened speed in China as a result of aggressive government policy. Regarding the auto, the fuel-efficiency battle has taken 40 years to produce a Japanese winner coming from a devastated state after World War II. The next battle for electric cars will definitely take less time. Why? The following realities are emerging that render electrification a high degree of urgency:
First, the world is running out of oil. For non-believers, the unrelenting price rise since 1973 should be a clear sign. You may want to blame OPEC, but you must answer the following questions: Why has the surge in oil prices failed to stimulate more production? Why do oil companies invest in alternative energy? Why do oil companies invest less and less in refineries and tanker fleet? Why do Saudi Arabia and some other Arab oil producers invest in solar?
Second, the continuous rise in oil prices for 40 years weakens the future of the oil industry because it forces people to think about substitution. As far as the car is concerned, there are only two engines to employ: gasoline or electric. The former burns oil that is increasingly expensive. The latter uses electricity that can be generated from a variety of renewable sources (sunlight being free). Hence the choice is not a complicated one, only the will to do it.
Third, increasing public awareness about climate change and environmental pollution encourages the switch from fossil fuels to renewable energy. When the changing climate produces a dramatic negative effect on fresh water supply, crop production, or rising sea level, the substitution of oil and other fossil fuels will take on a high level of urgency.
Fourth, the electric car will stimulate new associated industries such as car batteries, recharging infrastructure, raw materials to reduce car weight to compensate for a larger battery, and all kinds of renewable energy for electricity generation. Solar energy will benefit in particular because it can be readily installed at home, on office buildings and car parks that form part of the recharging infrastructure. Thus the electric car means enlarging the economic pie to provide more job opportunities in an age of rapid decline of outdated industries.
The electrification of the automobile is happening right now. On the one hand, it is driven by the urgencies as described above. On the other, it depends on one fundamental economic factor to trigger massive adoption. That is, when electricity reaches cost parity with oil. According to the experts, using solar electricity to recharge the electric car at home or elsewhere, cost parity will be reached within 4 years. For the car battery to last more than 200 miles rather than the present 100 as in the Nissan Leaf, it may take a couple of years longer. These time durations to reach cost parity will be shortened if oil prices continue to rise, or a breakthrough in technology is achieved, both of which are inevitable. Therefore, we will see this great strategic event unfolding within this decade.