China, the World's Largest Car Market and the Future of the Electric Car

A little known artifact of the implosion of the US auto market is that China has now surpassed America as the world's largest market for cars.  Now, the New York Times reports, China is plotting a strategy to accomplish for electric car manufacturing what it has already done in computers, toys and just about everything else.

Yesterday, Chinese officials, including Minister of Science and Technology, Wan Gang, a former Audi engineer detailed a plan to make China the world leader in electric cars.  It is a very achievable goal for the world's largest manufacturer that now sports the world's largest car market as well.  The effort involves a concerted effort by "manufacturers, universities, research institutes and government agencies" to overcome any obstacles.

The centerpiece of the strategy is a $8,800 (60,000 yuan) subsidy for taxi fleets and government agencies purchasing cars to make them more affordable but leave the buyer free to choose the car of their choice.  The program is thus more ambitious than the complex US tax credit program included in the stimulus bill that provides a tax credit of from $2500 to $7500 depending on a variety of factors.

China's policy shows more of the market friendly industrial policy that China has used to convert its vast reserve of cheap labor into an industrial V-8 engine. 

With the nascent but eventually gigantic electric car business entirely up for grabs, China is laying down the gauntlet to a US industry that is on the ropes and, at the moment, largely in the hands of one man: financier and now auto czar Steve Rattner. 

What should the US do?

First, it is vital that Rattner together with the other US officials overseeing the auto bailout, at all costs, insure that the US industry survives standing on three feet, not one, with all of the Big Three still intact and not hobbled by excessive downsizing.  The report of the taskforce that rejected GM and Chrysler's recovery plans, prompting Rattner to fire GM's well regarded CEO, Rick Wagoner, seemed to blame the US firms for failing to make investments in cleaner cars.  In fact, such investments cost the companies money in the short term and run entirely counter the goal of preserving capital to survive.  The US auto downturn is due, almost entirely, to a disappearance of credit.  GM, most advocates of clean energy vehicles believe, deserves considerable credit for its muli-billion investment in the Chevy Volt.  The fact is, the halving of US auto sales from about 18 million to under 10 million vehicles is due to the financial crisis.  Extraordinary volatility in fuel prices may have played a small role--but this was impossible for the auto companies to plan for--and may have reflected lack of financial oversight of commodity index trading as well.

True, the US may yet create new car companies from scratch.  Tesla, the VC-backed maker of a sleek electric drive sports car that can go zero to 60 in under 4 seconds has seen its sales increase from 14 million last year to a projected 140 million this year.  However, for Tesla to make the jump to the consumer market, it will need government guaranteed credit.  It has been waiting for more than a year for a loan to build a factory in Calfironia which the Department of Energy has yet to release.  Similarly, the Big Three are still waiting for the $25 billion promised them to make the transition to cleaner vehicles.  Had they received this money, they would not be in their current predicament.

If the US doesn't want to be left out of the electric car future, the first task is to extend the necessary credit on non-onerous terms to the carmakers to survive a crisis not of their making.  Once they are healthy, we should consider subsidies and a concerted effort similar to China's to assist them in what promises to be a brutal battle to control the future of automobiles--or we should pressure China to eliminate such subsidies but we cannot expect US companies to beat highly subsidized competitors.

Ultimately, however, without a robust auto industry in which GM and Chrysler are still standing, it is unlikely that we will even be in the running.