China’s $8 800 EV Subsidies Stand to Jumpstart a Big Market …

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China’s $8,800 EV Subsidies Stand to Jumpstart a Big Market for Electric Cars

Last Updated Jun 2, 2010 9:52 AM EDT

China, which is still mostly riding on two wheels instead of four, could be the first country in the world to get large numbers of EVs on the road — thanks a national commitment, centralized government planning and the generous subsidies announced by the Ministry of Finance Monday.

The U.S. government, which has been mainly bankrolling the construction of American battery plants in the hope that they’ll be built here instead of Asia, will have to move fast to stay ahead of the Chinese initiative. This effort will put a lot of first-time car buyers into EVs.

China has until now mostly supported electric cars with rhetoric, but now consumers in five cities (with Shanghai being the best known) will be able to get a whopping 60,000 yuan ($8,800) in direct government price offsets (paid directly to the carmakers). Plug-in hybrids are eligible for 50,000-yuan subsidies ($7,320). Previous subsidies, though similar in size, focused on taxis and local government EV purchases .

China is already the world leader in lithium-ion battery manufacturing, which means it has a head start in putting affordable cells into cars. China-market cars benefit from low-cost manufacturing generally, and are much cheaper than most vehicles sold in the west (the BYD F3DM plug-in hybrid, on sale in March, retails in the low $20s). Adding subsidies (paying as much as half the cost of the car) to China’s natural business advantage is likely to result in a huge jumpstart to the market.

Although this is just a pilot program in five cities (the others are Shenzhen, Hefei, Hangzhou and Changchun) and will wind down after 50,000 cars are sold, its importance shouldn’t be underestimated. The pilot could be made national with a few central committee meetings, and there’s no troublesome Congress for second guessing.

In the U.S. only California has a similar direct subsidy ($5,000 on the Nissan Leaf, for example, giving it a bottom line of only $20,000), and that’s just one reason that state will be a major early adapter for EVs. The Obama administration should take a good look at that California incentive as a way to stimulate EVs nationally.

The U.S. has done a great job with mechanisms for low-cost manufacturing, but China is doing a better job of funding the end user, said Jeff Seidel . chief strategy officer at battery maker Ener1 (which just announced a major joint operating agreement to supply battery technology to China with the EV division of huge parts maker Wanxiang ).

The EV market globally is really rather artificial in the short term, said Craig Giffi . Deloitte ‘s U.S. leader of automotive practice, in an interview. There are a lot of barriers, including the high cost of batteries, range anxiety, long charging times, a lack of public infrastructure. So because there isn’t a market yet for electric vehicles that will satisfy consumer expectations, these subsidies matter a lot to bring down the barriers.

Deloitte estimated in a recent market forecast that battery cars could be only 3.1 percent of the U.S. market in 2020. That’s based on low volumes of about 12,000 cars per OEM manufacturer, which Deloitte says does not appear to be sufficient to push the cost of the battery lower.

Battery costs are probably the biggest barrier to reducing EV costs, and lithium-ion companies say can only lower prices if their shiny new Obama-subsidized plants are running at full capacity. And that will take sales volume not possible if consumers are put off by price, range and other challenges.

Richard Lowenthal . CEO of charging company Coulomb Technologies . pointed out in an interview out that, largely because those battery factories are starting to ramp up, the lithium-ion cost per kilowatt-hour has fallen by half in the last 18 months. Subsidies are tremendously important for us, he said. The first cell phones cost $2,500, and they had to wait a fair amount of time for the batteries to get smaller and cheaper.

Subsidies, both to battery companies and consumers, mean we don’t have to wait.

© 2010 CBS Interactive Inc. All Rights Reserved.

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