How China Is Set to Become the World Leader in Electric Vehicles
The quest to achieve transient advantages in an embryonic industry
Tesla Motors Inc. (NASDAQ:TSLA) , the electric-car maker led by Elon Musk, recently rose past $100 a share for the first time as it continues its impressive 201 percent year-to-date ascent. The Palo Alto based company has exacted the attention of mainstream Americans living outside of Silicon Valley, but more notably, it has washed away at least some of the initial skepticism stemming from those inside the Valley regarding the technology empowering electric vehicles, and some of American society’s apprehension to embrace a new, expensive means of transportation.
Tesla’s Chinese Counterpart
Six thousand and four hundred miles away from Tesla’s headquarters —and roughly a three hour car ride away from Shanghai—lies a sprawling manufacturing facility where little of that societal doubt resides. The facility, which is situated in a restless industrial park in Jinhua of Zhejiang Province, China, embodies the surging national drive to produce and adopt electric vehicles. Production within the facility used to center on only ATVs, utility vehicles, go-karts, and motorcycles.
The differences between the company and its American counterpart are notable. Tesla has a very high international profile, which is a result of significant global analyst coverage, increasing institutional holding, and a unique and charismatic CEO who attracts hundreds of media pundits. Almost the complete opposite, this company has zero analyst coverage, minimal institutional holding, and is headed by a very private chief executive.
Very few people outside of mainland China have even heard of this Chinese company, but there’s a high probability that the name of its largest backer will ring a bell for most: the People’s Republic of China.
In 2009, the PRC recognized that while domestic automakers probably couldn’t catch up with their global rivals’ internal-combustion-engine technology anytime soon, it had the potential to assume a leading position in the fledgling electric vehicle segment. This approach could succeed, the government hoped, if Chinese companies rapidly brought battery-electric vehicles to mass production and consolidated technological advances in batteries, traction motors, and power electronics. And so began the frenzied pivot at Kandi Technologies away from off-road vehicles and towards vehicles of the country’s future.
A few months ago Kandi Technologies Corp. was enticed by Geely Auto (0175.HK)—China’s fast growing and top passenger automaker that acquired Volvo—into a one billion renminbi (164 million USD) fifty-fifty joint venture, named Zhejiang Kandi Vehicles Co., Ltd. Geely will relinquish their ten plus years of EV R&D, top level EV licenses, and their current product line of EV’s to the joint venture.
On April 3rd, 2013, Kandi purchased China’s first “state of the art, built from the ground up” pure EV manufacturing facility for 273 million renminbi ($43.2 million USD). Mass production in the facility is scheduled to begin soon with initial annual capacity of 100,000 electric vehicles and expandable to 300,000 annually.
Kandi will likely utilize the facility to produce the first pure electric sedan jointly developed by Kandi and Geely Automobile Holdings Ltd that received approval from China’s Ministry of Industry and Information Technology. The approval of Kandi Technologies’ first full electric sedan, JL7001BEV, gives prominence to the government support imparted to Kandi and Geely. It can be argued that they are operating in a market that is destined to grow thanks to the influence and support of the Chinese state. The National Development and Reform Commission received a proposal from Shanghai’s economic planning authority to subsidize electric car purchases to the surprising tune of up to 100,000 yuan ($16,310). Some people may shrug at this news, but those who have been closely following the Chinese electric vehicle market can identify this proposal as yet another example of the unified agenda shared between China’s public and private sector.
China is taking significant steps to manifest itself as the world leader in green technology. How exactly is China headed towards a path of electric vehicle dominance, and what does it mean for you as an entrepreneur and investor?
A Strategic Industry
One answer is exceptional growth. Back in July of last year, news came out of Beijing that China labeled seven emerging industries as being nationally strategic; this designation indicates that these industries will be closely incubated, assisted and protected by the Chinese state, and that they will serve as new growth engines for China’s economy. New-energy vehicles have been blessed with this designation, and to this industry in particular, China is willing to dedicate even more resources than what some might expect: China has a tentative goal of seeing electric vehicle sales (public and private) of five hundred thousand by 2015 and five million by 2020. This 900 percent growth is only one planned by-product of an ambitious road map unveiled by the Chinese government for expanding the country’s electric vehicle industry.
“China has committed to achieving sustainable energy innovations in all aspects of society, including transportation”, says Christina Lame-Onnerud, the founder of Boston-Power, which is funded by top-tier venture capital firms GSR ventures, Foundation Asset Management and Oak Investment Partners.
This commitment is fueled due to the many benefits that are associated with widespread adoption of electric vehicles. China is aware that such a move could help it not only to manage its energy dependency and environmental concerns but also to build an auto sector that could leapfrog its global competitors in this emerging industry.
Electric vehicles would curtail consumption of oil-based fuels and enhearten China’s energy independence: the cars would power up with electricity generated primarily from domestic coal and potentially from thorium. China otherwise faces the prediction that oil consumption will swell by 70 percent between 2010 and 2020, given current expectations for the per capita growth of vehicle ownership. The country would then find itself increasingly exposed to global supply fluctuations.
Carbon dioxide emissions and air pollution, a significant problem in China, could be drastically reduced by a widespread adoption of electric vehicles. A recent report by McKinsey & Company estimated that “on a well-to-wheels basis, battery-powered electric vehicles can cut carbon dioxide emissions by about 40 percent compared with vehicles powered by internal-combustion engines. Local mobile emissions of both carbon monoxide and nitrogen oxides could fall by roughly 99 percent and 50 percent, respectively.”
Achieving Transient Advantages
Most policy makers, executives, and leaders are using frameworks that were designed for a different generation of business and based on a single ascendant idea—that the desideratum of strategy is to achieve a sustainable competitive advantage. Once the premise on which all strategies were built, this idea is becoming increasingly irrelevant, and discarded in favor of strategies that favor continuous, transient advantages.
Transient advantages call for a whole new playbook, says Columbia Business School’s Rita McGrath. Applying this new way of conceptualizing competitive advantages to the Chinese electric vehicle market is particularly interesting; McGrath has identified several major operational shifts that must be undertaken before transient advantages are manifested, and several of these shifts are already occuring in the Middle Kingdom.
Think About Arenas, Not Industries
In the modern business world strategy involves orchestrating competitive moves in what McGrath call “arenas.” An arena is a combination of a customer segment, an offer, and a place in which that offer is delivered. Though it may seem that this new paradigm suggests that industries themselves aren’t relevant anymore, it argues that industry-level analysis no longer gives you the full picture.
A transient competitive advantage is more concerned with the utility value a product or service is assigned by its customers, and less concerned with having superior profit margins compared to industry peers.
The differences between Tesla and Kandi in the electric vehicle arena are a good example of this concept. Though these two companies are in the same industry, they currently are not in the same arena because of different customer segments, different offers, and different countries of operation. Tesla produces a car with a base price of $62,400, including the $7,500 Federal Tax Credit, while Kandi produces a car that appeals to consumers because of its price of only 43,000 yuan ($7,013). That’s before government subsidies of 32,000 yuan ($5,219) which bring the actual cost to just 11,000 yuan ($1,794). Tesla offers a product that is pitched to customers as a flashy, cutting-edge technological marvel, while Kandi offers a product that is pitched as a practical, convenient means of transportation for the urban Chinese lifestyle.
Focus on Experiences and Solutions to Problems
As barriers to entry tumble, product features can be copied in an instant. Even service offerings in many industries have become commoditized. Once a company has demonstrated that demand for something exists, competitors quickly move in. What customers crave—and few companies provide—are well-designed experiences and complete solutions to their problems. Unfortunately, many companies are so internally focused that they’re oblivious to the customer’s experience.
Tesla currently suffers heavy criticism for the inability to travel long distances in its electric vehicles, and it is a main contributor to the inertia that is holding electric vehicles back from selling very well.A policy paper by the PRC’s highly influential State Council Development Research Center Enterprise Institute exemplifies how China doesn’t have this problem:
Scale of many features into a small niche market. Market demand of the Chinese market has a multi-level, so many in Western countries for “niche market” only “ mass product “ in the Chinese market . The electric bicycle is a typical example. In Germany and other Western countries, and would very much like to be able to promote electric bike, but due to various reasons, only a small niche market-oriented electric bicycles. But is different in China - As of 2010, China’s electric bicycle ownership has been as high as 120 million. This was originally in the Western countries is considered only for “niche market” products in China has become a “mass product”. Equally by Europe and the United States can only be the product of a “niche market” short-distance pure electric vehicles in China will probably become mass products. Therefore, in business model innovation, exploring the development of short-distance electric car niche markets, better fund research and development of electric vehicles mainstream products in the industry value creation, nurturing.
Access to affordable, convenient, and green transportation is the need expressed by China’s populace. Most Chinese are just interested in getting to and from work in an advantageous manner instead of an electric vehicle that can travel hundreds of miles for a road trip on a single charge. The PRC is fully aware of this and is seeking to design an amazing, fulfilling experience conciliating this need.
Build Strong Relationships and Networks
Establishing substantial relationships with customers and partners through investing in communities, whether digital or geographical, is a way of deepening ties and creating a transient advantage.
These types of relationships are flourishing within dozens of Chinese cities. Municipal governments are pushing electric vehicle adoption by negotiating contracts with EV manufacturers such as Kandi for public transportation fleets. State owned agencies, such as the State Grid, are working side by side with these manufacturers to create a present and future electric ecosystem that can propel the country forward.
The State Grid is a massive powerhouse. It is difficult to fathom just how massive it is. By far the largest electric utilities company in the world, it currently supplies power to over 88% of China—a land area that is populated by over one billion people. It leverages its huge size, and its ability to start building Smart Grid technology into its transmission infrastructure from scratch rather than retrofitting an antiquated system.
The SGCC is playing a vital role as an apparatus that is laying the foundation for the emergence of electric vehicles. It plans to spend over $400 billion within the next four years during its ambitious construction phase — the second phase of its smart grid deployment plan that will conclude in 2015. In Hangzhou, which is roughly a hundred miles southwest of Shanghai, the municipal government, the SGCC, and Kandi Technologies have entered into a Strategic Cooperation Agreement that has resulted in the service network being built by State Grid supporting Kandi’s technical requirements and infrastructure needs while permitting efficient and effective operation of Kandi’s EVs.
Experiment, Iterate, Learn
The former U.S. Secretary of State Condoleezza Rice once said, “After all, when the world looks to America, they look to us because we are the most successful economic experiment in human history.” She must of failed to take into consideration the dramatic rise of the Chinese economy during the past few decades, and the startling projections for the next few decades. In only thirty years, China grew its economy from roughly $300 billion to $8 trillion, or 2,556%, while America grew its economy from roughly $2.875 trillion to $16 trillion, or 475%. China has achieved this remarkable growth by undertaking one ambitious experiment after another, iterating to improve its results, and learning from its mistakes.
Public fleets - especially bus fleets - is yet another experiment and it will represent the initial wave of electric-vehicle adoptions in China. As the world’s largest maker of buses, Chinese automakers can rapidly reach manufacturing scale and reduce costs by securing large commercial orders. Buses can also address current limitations of electric-vehicle battery life by offering space to store extra batteries. City buses run fixed routes and are serviced and maintained in central garages, which would greatly facilitate battery charging or swapping, according to McKinsey & Company.
If the experiment is a success, it could pave the way for broader consumer adoption in the future. Besides the heightened visibility these increasing sales in the commercial market would give to electric vehicles, they will enable China to reach critical mass in manufacturing scale and push the entire value chain to ramp up capacity and deepen its capabilities. These developments would help drive down costs, improve performance, and promote the rollout of a charging infrastructure.
Transitioning Towards China 2.0
The country that will eventually become the first to champion widespread green, affordable electric transportation is yet to be known. China has made it a goal to have the bragging rights. It wants its economy to transition to a more advanced one that pursues biotech, nanotech, energy-saving and environmental protection, and information technology. It wants its society to transition to something along the lines of a technological utopianism.
Transient advantages are obtained by capturing opportunities fast, exploiting them decisively, and moving on even before they are exhausted. History has shown that a surfeit of opportunity always ensues the emergence of revolutionary markets.
If another country wants to become the world leader in electric vehicles, it will have to move fast.