China has bumped Japan from its position as the most competitive country in electric vehicles, according to the latest international rankings. Beijing's aggressive promotion of the cars -- partly to address the country's serious air-pollution problem -- has made the country the world's biggest market.
And it is stepping on the accelerator. The government plans to introduce as early as next year a regulation that will require as much as 8% of a carmaker's production in China to be "new-energy" vehicles. But it turns out that these cars do not include gas-electric hybrids, a technology Japanese automakers excel in. It is almost as if China is using the policy to undermine those manufacturers.
Ranked and rated
In June, German consultancy Roland Berger and German automotive research company fka said that China had moved into pole position for the first time in its E-mobility Index. The results showed that Japan, which ranked No. 1 in the January-March period, had been replaced by China for the April-June ranking. Next in line was the U.S., then Germany. Japan did not even make the top three.
The countries were scored in three categories: technology, industry and market. While Japan ranked third in the areas of technology and industry, China was first in the industry segment and second in the market segment.
Statistics clearly show that China has overtaken Japan in unit sales of electric cars and plug-in hybrids. Combined sales of both types in Japan have held steady at around 30,000 vehicles a year since 2012; in China, the figure surged to about 330,000 in 2016, compared with roughly 12,000 in 2012.
According to the International Energy Agency, combined cumulative sales in China of electric and plug-in hybrid cars have reached about 650,000 units, outstripping the 560,000 in the U.S. to make it the world's largest market for such vehicles.
China's rapid transformation into the global electric vehicle king owes much to ample support from the government. Consumers there enjoy steep tax cuts on such cars, while manufacturers receive subsidies. Registering a standard vehicle in a big city can be extremely difficult, but electric cars get priority treatment. Also, trials are underway for providing discounts on toll charges and parking fees for such vehicles.
Tesla electric vehicles are on display in a Beijing showroom.
And during all this time in which Chinese manufacturers have been boosting their share of the electric market, Japanese automakers have focused on gasoline-electric hybrids.
Japanese makers have been slow to introduce their electric models in China. These companies seem to think they will be able to maintain their industry position with hybrids until they develop fuel cell vehicles into the industry mainstay for new-energy vehicles. But China's planned sales rules for such cars threaten that scenario.
Under the framework envisioned by Beijing, the volume of new-energy cars that companies manufacture and sell in China will be linked to the scale of their business in the country. This is problematic for Japanese automakers because new-energy cars, according to China's definition, do not include hybrids, an area of great strength for them.
The rules are expected to be similar to the zero emission vehicle program in the U.S. state of California, which promotes the use of cars that generate no emissions while moving. Hybrids do not qualify as such cars because they use a gasoline engine, meaning they cannot reduce emissions to zero. Alarmed, Toyota Motor and Honda Motor have announced plans to introduce their electric and plug-in hybrid models in China.
Naturally, China will attribute the exclusion of hybrids to their higher environmental load. But reading between the lines, it would seem as though China wants to knock Japanese cars from their traditionally dominant position.
These days, the Chinese media loves to go on about how the country's auto industry is not thriving as much as other industries. China is one big factory for the world, exporting huge quantities of appliances, smartphones and other gadgets. It has received orders to build high-speed rail systems abroad, and its has developed passenger aircraft that are nearly technologically strong enough for export. Chinese cars, in contrast, have yet to narrow the gap with their Japanese counterparts.
BYD is one of the better-known electric-vehicle makers in China, but its brand recognition is low elsewhere.
China churned out over 28 million vehicles last year, but its auto exports shrank on the year to 710,000 units. Meanwhile, Japanese brands have slightly increased their market share there.
Ultimately, the weakness in China's auto industry can be attributed to the lack of strength in its auto component industry. The heart of the vehicle is the engine. The quality of the engine relies on assembly technique as well as the parts they are composed from. The 10,000 to 30,000 parts that make up an engine need to be produced by suppliers that have advanced casting and forging technologies.
China's parts makers do not match up to Japan's in this regard. Hybrids are based on engines, so it would be difficult for Chinese automakers to beat Japanese rivals if such cars were counted as new-energy vehicles under the new rules. How about electric vehicles? The number of parts goes down to 100 or so. Given the large number of electronic parts makers in China, entering the electric-car manufacturing business there is not especially difficult. For Beijing, embracing such cars is an easier way to bring the domestic auto industry up to speed than by trying to raise the quality of engine parts.
Indeed, many new players are rushing in.
NextEV, known for its Nio brand of electric cars, counts internet company Tencent Holdings among its shareholders. Video streaming company LeEco entered the market under the brand name of LeSee.
The German survey mentioned above said the growth of China's electric-car industry is driven in large part by the big number of startups and availability of ample funding in the country.
The smartphone lesson
Even as China's electric-vehicle makers gain momentum, some Japanese industry insiders say there is no need to worry about Japan's position in the market, citing the country's strong base in technologies essential to making such cars, such as battery technology.
Panasonic has deepened ties with Tesla in battery technology, while Nissan Motor has worked closely with NEC. It is difficult to imagine the world's electric-car industry without Japanese technology and players. But then again, remember how Japanese companies failed in smartphones?
Japanese players had the edge in electronic parts for smartphones, but their share of finished products is far behind that of Apple and China's Huawei Technologies. In smartphone operating systems, Apple and Google are the dominant players, and the U.S. companies have established the leading position in the overall systems, including apps.
On the manufacturing side of things, meanwhile, Chinese makers turn out over half of the world's smartphones, even if they do rely on Japan for core components. Chinese companies benefited from low entry barriers to the smartphone assembly business thanks to the modularization of smartphone architectures.
In the global smartphone business, Japan's manufacturers only provide parts, whereas the operating systems and applications are provided by the U.S. and assembly is handled by Chinese players. Japan's position is at a disadvantage because no industry is complete -- no matter how advanced the parts or technology it possesses -- if it does not produce the final products, including the overall system.
And without finished products, it loses its advantages in related business areas, including the internet. As automobiles are increasingly regarded as a network terminal, holding a large share in the finished product is key to securing a strong position in the systems area, such as self-driving technology.
In the struggle for dominance in new-energy vehicles, Japanese makers are once again pitting themselves against Chinese and U.S. rivals. This time, they must be careful not to repeat the mistakes made in smartphones.