Chinese cities adopt taxi VaaS, drives EV adoption in troubled market

Chinese EV manufactures have had a tough month after the central government’s subsidy programme was overhauled, leaving them searching for support from their regional provinces as the central administration gets tough on the industry. They are hoping that bulk orders from local government should keep sector growth moving.

Recently, the City of Beijing council announce plans to replace its entire taxi fleet with electric vehicles (EVs), by 2022. Beijing’s 70,000-strong fleet of taxis, is currently made up of gasoline and diesel fuelled vehicles, with running costs and air pollution concerns at the fore.

As the auto industry moves towards vehicles-as-a-service (VaaS), these kinds of fleet-scale deals are going to become more commonplace, and China looks to be leading this trend – largely due to the nature of state business ownership.

The City of Beijing owns one of the country’s largest EV manufacturers, the Beijing Automotive Industry Corporation (BAIC). The plan amounts to the City of Beijing placing a bulk-order from a company it already owns. This is a huge order for BAIC, when EV sales peaked in 2016 the company sold around 40,000 road vehicles – and with the new order, it looks like BAIC has secured another 70,000 guaranteed sales.

Business activity between provinces and EV manufactures is a growing trend in China. The murky political climate makes for difficult outside reading, but it seems clear that there are multiple vested interests to balance in these sorts of deals.

Shenzhen, a city home to a population of 10.8m, across the border from Hong Kong, declared that all new taxis must be electric. The city is also home to the country’s largest EV manufacture Build Your Dreams (BYD), and the local administration is clearly a keen supporter of the local business – which employs 100,000 staff, mainly in the province.

The North China city of Taiyuan, is also on track to meet a commitment to make all taxis electric by 2021, again to be supplied by BYD. Regional administrations in China have control of the localised taxi fleets, and are using this control to provide new support for local EV manufacturers.

For the last 5-years, the central Chinese administration has been nurturing the country’s EV automakers, with subsidies and tax breaks. The support has been motivated by several critical factors.

China is the current largest market for automobiles, with 27.5m vehicles being purchased in 2016 – 50% more than America. The large numbers of vehicle sales have meant an increased national dependence on imported oil. Politically, EVs are seen as a path to greater energy independence.

Improving the country’s air quality is also high on the administration’s agenda. Fossil fuels are not only polluting the air to hazardous levels, they have also become politically toxic – and consequently, China is also one of the fastest adopters of renewable energy generation.

Chinese provinces are stuck in a constant cycle of issuing serious warnings against smog, as Riot reported earlier this year.  According to former communist party official Chen Jiping, air pollution has become the country’s largest source of social unrest.

Smog-filled cities have been slowly eroding the administration’s authority. In December 2011, 30,000 citizens protested against the construction of new coal-fired power stations in the city of Haimen Guangdon province.

China’s EV manufacturers appear to offer part of the solution to the country’s pollution problems, and so have been able to court support from the country’s policy makers. The growing EV market, also represents a large opportunity to become a key global leader in an emerging technology. Chinese automakers have been trying and mostly failing to catch up with their global counterparts, for decades. It seems that the gap is narrowing.

The emerging EV markets present an open door to technology leadership. Batteries make up the most expensive and crucial components in EVs. If EVs are going to achieve full price parity with combustion engines, then batteries need to be produced cheaply and at increasingly large volumes.

At the time of writing, nine gigawatt-scale battery factories are currently under construction in China, so don’t be surprised if China does significantly push down the cost of battery cells, to assume a leadership role in the coming EV market.

These factors have been driving the administration’s support for the countries EV manufacturers. However, this support has not always been taken in good faith. Last year saw the government punish five automakers for defrauding the government’s EV subsidy programme to the tune of $150m. The EV manufactures had been making claims for unsold vehicles, which were then left idle after the companies had received the payouts.

At the end of 2016, the government was unflinching in adding stricter rules and a planned 20% cut in the subsidy. Consequently, January 2017 saw a large slump in the number of EV sales. The Chinese market had 6,260 new EVs registered in January, 40% of 15,275 units of January 2016, dragging down the plug-in market share (of new cars sold) to just 0.25%.

The Chinese government believes that changes will be good for the long-term competitiveness of the industry, as companies are forced to meet higher quality standards to gain access to the subsidy. EVs must be safer cars, have longer ranges, and be more highway capable – regulations that look set to cut out many of China’s cheap city vehicles.

China’s largest EV manufacturer, and usual sales table topper BYD, performed particularly badly during that January, churning out its worst monthly sales figures in over four years. Rumours say that the manufacturer is preparing new batteries with a different chemistry, using a down-turn in sales as an opportunity to reorganise production.

As for Beijing, the city’s commitment to developing EV fleets will give domestic EV manufactures one reason to be positive, in the wake of those subsidy cuts.