Environment & Energy Report

Quality, Safety Issues May Put Brakes on China’s E-Vehicle Push (1)

Feb. 19, 2019, 10:00 AMUpdated: Feb. 19, 2019, 5:14 PM

China’s government and auto industry are dead set on switching from fossil fuel vehicles to electrified ones by mid-century, with some claiming the country will be the future Detroit for electric cars.

But this push toward the goal, with its subsidies and quotas, could overwhelm the electric vehicle industry with overcapacity, quality issues, and safety concerns as China seeks expansion domestically and globally.

With more than 100 electric vehicle manufacturers, about half as many battery makers, and almost 500 EV startups, the government is struggling to keep pace with quality standards.

Though sales of electrified passenger vehicles passed the 1 million mark in 2018, recall rates stood at over 13 percent, and vehicles were depreciating by half in three years, according to the China Passenger Car Association. The central government wants to double sales to 2 million annually by 2020.

“Like ants to sugar, scores of companies have swarmed into the [China] EV sector to take advantage of subsidies and other government incentives,” Michael Dunne, CEO of automotive consultancy ZoZo Go, told Bloomberg Environment. “Many have had little or no experience but sense an opportunity.”

“This had resulted in a highly uneven product quality.”

China is phasing out subsidies on purchases of EVs, cutting them by 30 percent this year. It will remove them fully by the end of 2020.

“The phasing out of subsidies will soon cause the weaker less well funded players to exit the business,” Dunne said.

Vehicle Recalls

The biggest hit to automakers so far came last December, when BAIC Motor Corp. Ltd., which plans to stop selling gas-powered vehicles in Beijing by next year, recalled more than 69,000 vehicles due to brake flaws.

Major electric vehicle manufacturer Shenzhen-based BYD Auto Co. Ltd. had more than 10,000 vehicles recalled over faulty airbags. The automaker declined Bloomberg Environment’s request for comment.

Battery quality also has been problematic. Twenty-two percent of 8,000 electric vehicle owners in a survey reported experiencing charging failures, decay, and electrical malfunctions, according to a report by state-run CCTV aired on Consumer Day in March 2018.

“China’s trying a ‘great leap forward’ approach for this industry,” Scott Kennedy, a senior adviser at the Center for Strategic and International Studies in Washington, told Bloomberg Environment. “But this has resulted in a variety of problems, as expected.”

The country has the “age-old problem” of insufficient regulation to ensure quality standards are met in line with automakers’ claims, he said.

Catching Fire

Safety is another concern. China’s State Administration of Market Regulation indicated that more than 40 EVs caught fire in 2018, with the primary issue related to electrical systems or mechanical failures.

Quality and safety issues could come back to haunt China’s brands and scare away buyers, according to Thibaud Andre, research director at market research firm Daxue Consulting in Shanghai.

“It might shape the future structure of the market as it did in other industries and drive the consumer toward foreign manufactured [vehicles], as some of the renowned international brands have a rather high reputation for quality, safety, and prestige already,” Andre said.

The Electric Vehicle Industry Technology Innovation Strategic Alliance declined to comment, and the China Electric Vehicle Association didn’t respond to requests for comment.

Grand Ambitions

Yet China’s government is pressing forward on all fronts. The government is ordering major automakers and importers of more than 30,000 vehicles to have 10 percent of their fleet made up of electric vehicles by the end of the year, under a program based on a cap-and-trade credits system announced in January.

The government has also started banning construction of new facilities to build combustion engine vehicles and requires new plants producing electric vehicles to have a minimum production capacity of 100,000 vehicles a year.

The country’s electric vehicle industry association, ChinaEV100, wants the government to ban traditional fuel vehicles as soon as possible as part of overall phaseout plans, which don’t yet have a deadline.

The southern island province of Hainan, which is being set up as a province-wide free-trade zone, already announced plans to fully electrify by 2030.

But Kennedy thinks Hainan’s goal is wildly unrealistic, as charging infrastructure and quality-made vehicles would have to massively increase.

“It is not an unreasonable goal to promote the industry for reasons of the environment, for reducing dependence on foreign oil, for industrial policy, but the rapidity of this has resulted in a variety of problems,” he said.

(Adds comments from Michael Dunne in 7th and 8th paragraphs.)

To contact the reporter on this story: Michael Standaert in Shenzhen, China, at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Gregory Henderson at ghenderson@bloombergenvironment.com; Jean Fogarty at jfogarty@bloombergenvironment.com; Susan Bruninga at sbruninga@bloombergenvironment.com; Anna Yukhananov at ayukhananov@bloombergenvironment.com

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