World Bank/PRTM study finds global value chain shift resulting from vehicle electrification could favor China from technology and supply chain perspectives

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PRTM projects that the global EV value chain will likely be greater than US$250 billion by 2020. Click to enlarge.

Driven by four global megatrends—reducing CO2 emissions, oil concerns, growing congestion, and rapid technology advances—countries worldwide are focusing strongly on vehicle electrification. Industry forecasts suggest that the global electric vehicle sales will contribute between 2% to 25% of annual new vehicle sales by 2025, with the consensus being closer to 10%. As a result of this the a transition, there will be a significant shift in the overall value chain in the automotive industry.

A newly released report financed by the World Bank and prepared by consultancy PRTM analyzes China’s New Energy Vehicles Program, as well as the Ten Cities, Thousand Vehicles Program, in the context of these megatrends and concludes that the overall value chain shift could favor China from both a technological and supply chain perspective.

While high barriers to entry will likely prevent Chinese automakers from developing a significant global position in an industry where internal combustion engines are the dominant propulsion source...China is likely to benefit in the EV drivetrain components value chain. This is largely due to China’s strength in batteries and motors.

For example, as one of the major players in lithium batteries for cell phones, China has established the production capability and value chain to cost-effectively produce lithium batteries in scale. In addition, China also possesses an advantage in electric motors, which is partly due to its position as the dominant producer of rare earth...Rare earth materials, specifically neodymium, contribute approximately 30 percent of the material cost of permanent magnet motors, one of the key motor types used in electric propulsion systems. This raw material dominance, along with China’s relative labor cost advantage, has resulted in an emerging extended supply chain in motor technology and production.

—“The China New Energy Vehicles Program”

The findings of the study, “The China New Energy Vehicles Program: Challenges and Opportunities” are based on in-depth research and interactive sessions with government, municipal and industry leaders and were discussed at a workshop jointly hosted by Beijing Municipality and the World Bank in June 2010.

The study was conducted by consulting firm PRTM, with additional support provided by the Electrification Coalition (EC), International Council on Clean Transport (ICCT) and the Innovation Center for Energy and Transportation (ICET).

The study estimates that global sales of plug-in vehicle will likely constitute 10% of new vehicle sales by 2020. This rapid growth is expected to usher in a new global electric vehicle era estimated to be worth US $250 billion worldwide in ten years creating unprecedented opportunities across the transport sector. Yet, China and other countries face steep challenges in promoting electric vehicles.

The shift from combustion to electric vehicle technologies presents an opportunity to rethink mobility strategies worldwide, and to create a new generation of mobility options. We will see significant technological and business model innovation as we move toward a new urban mobility paradigm.

—Oliver Hazimeh, Director and Head of the Global e-Mobility Practice at PRTM

The team’s analysis of electric vehicle policy, technology and commercial models found the following challenges for China moving forward with vehicle electrification:

  • Policy. Currently implemented policies related to EV in China mainly focus on incentivizing vehicle adoption through purchase subsidies at a national and provincial level. Policies to stimulate demand for EVs, to deploy vehicle-charging infrastructure, and to stimulate investment in technology development and manufacturing capacity also need to be developed. China’s recently announced plan to invest RMB 100 billion (US$15.3 billion) in new energy vehicles over the next 10 years will need to include a balanced approach to stimulating demand and supply, the report finds.

  • Integrated Charging Solutions. Since the early vehicle applications have been with fleet vehicles such as bus/ truck or taxi, charging infrastructure technology development in China has focused on fleet needs. As private cars will need to be fully involved eventually, integrated battery charging solutions need to be developed to cover three basic types: smart charging, standardized/safe/ authenticated charging, and networked and high service charging.

  • Standards. China has not yet launched its national standards for EVs. The first emerging standard is for vehicle charging. The full set of such standards should not only govern the physical interface, but also take into consideration safety and power grid standards. To facilitate trade and establish a global market, ideally standards would need to be harmonized worldwide to minimize costs. State Grid, the largest Chinese utility, has established charging standards, but these differ from US and European standards which would add to cost and inhibit access to global markets.

  • Commercial Models. The EV value chain is beginning to develop new business models to provide infrastructure, component vehicle, and related services. It is essential to build a commercially viable business model which bears the cost of charging infrastructure, as the industry cannot indefinitely rely on government funding, the report suggests. It is also likely that revenue collected from services can help off set the cost of infrastructure.

  • Customer Acceptance. In the long run, consumers will only commit to electric vehicles if they think these cars are worth the additional cost. Even when lifetime ownership costs become favorable, up-front electric vehicle costs will still be higher than conventional vehicles and with a longer payback period.

  • GHG Benefits. The biggest challenge faced by China is that the current Chinese electricity grid produces relatively high greenhouse gas (GHG) emissions and is projected to remain GHG-intensive for a significant period of time, due to the long remaining lifetime of the coal-fired generation capacity. A new framework for maximizing GHG benefits in China has to be developed to fully realize the low emission potential of electric vehicles.

China is pursuing an ambitious electrification program. Yet the challenges it faces are similar to those faced elsewhere in the world. Many of them...have centered on the supply side issues surrounding the provisioning of the charging technology and the batteries.

...On the demand side, customer acceptance is still a significant unknown. Although it is generally accepted that however successful the EV sector is, it will not satisfy much more than the demand of the “early adopters” in the next 10 years, through 2020. The costs of ownership will be a central issue throughout the decade as costs have to be reduced significantly as government subsidies and incentives will be phased out.

Even the reported RMB 100 billion dedicated to the China New Energy Vehicles program will not be sufficient to subsidize purchases for the entire decade. If consumers do not find value in EVs, it will be very difficult to convince buyers to commit to them.

—“The China New Energy Vehicles Program”

Resources

  • The China New Energy Vehicles Program: Challenges and Opportunities


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