Anybody attending Auto Shanghai 2009 in late April would never have guessed that the global economy is in recession. More than 90,000 visitors crowded into the Shanghai New International Expo Center every day to get a glimpse of the more than 900 new models exhibited by car vendors targeting China's car market, now the world's biggest with 10 million vehicles expected to be sold this year.

Though foreign makers were there to grab the attention of China's consumers, China's automakers may have made the biggest splash with the introduction of "new-energy vehicles." More than 10 Chinese car manufacturers, including FAW Group Corporation, SAIC Motor Corporation, Chery Inc., Geely Holding Group Co. and BYD Company Ltd., brandished the banner of environmental protection and energy conservation by exhibiting more than 50 new fuel-saving car models.

"It used to be that only BYD was producing alternative fuel vehicles. Now a whole handful of companies has entered the market," says Wang Jianjun, the assistant to BYD Auto's president.

"New-energy vehicles are the weapons of choice being used by China's auto industry to fend off the global economic downturn," said PRC science and technology minister Wan Gang during the Shanghai auto show. And Wan makes clear that this is the wave of the future. China's government intends to expand R&D and testing for alternative fuel vehicles, and the Ministry of Finance and Ministry of Science and Technology have devised a comprehensive incentive program to foster the green automotive sector.

In the first quarter of 2009, China's auto market surpassed that of the United States to become the world's largest, and this quantitative change is likely to engender a qualitative change.

China is now determined to become the dominant player in the era of the "new-energy vehicle."

Unflinching Government Support

"In the car industry's 100-year history, China has been missing for more than 60 years. New-energy vehicles must exert global influence," stresses Chery chairman Yin Tongyao.

In the early stage of the development of alternative fuel cars, government incentives and supportive policies are critical. "With the encouragement of the government, Chinese enterprises have the chance to promote new-energy vehicles in international markets," Yin says.

After the government launched its green vehicle strategy in 2006, it introduced a series of incentives and complementary measures in rapid succession. Last year, China's National Development and Reform Commission announced its first set of new-energy vehicle prototypes, and since then more than 40 companies have become involved in related R&D.

China's central government has relied mainly on procurement programs and purchase price subsidies to directly offer carmakers a testing ground for their newest products. Local governments have also aggressively backed local vehicle manufacturers in developing more energy-efficient cars.

For example, within one month after Shenzhen-based BYD launched its F3 dual-mode plug-in hybrid car at the end of last year, the Shenzhen government installed electricity plugs in city-run parking lots, creating the perfect environment for BYD to test its new model.

Another example of this support: When the Shanghai World Expo opens on May 1 next year, 1,000 new-energy vehicles will be on hand.

Also, China's Science and Technology Ministry put in place a "10 Cities, 1,000 Vehicles" new-energy vehicle model program last September and more recently decided to purchase an additional 30,000 energy-saving vehicles for use by public administrators, city governments, the postal service and public transport companies.

Beijing-based Beiqi Foton Motor Co. also took a big step, investing 5 billion renminbi to build China's first new-energy vehicle production base in suburban Beijing. The company has built an assembly line capable of producing 5,000 alternative-energy buses and 400,000 energy-efficient engines per year in the 1,000-acre complex, and has already signed a contract with Beijing Public Transport Holdings for 800 hybrid buses.

"We've brought together more than 10 research institutions, including the Chinese Academy of Sciences, Tsinghua University, and the Beijing Institute of Technology, in our Alliance of Beijing New Energy Automotives to pursue an R&D plan in the areas of hybrid power, pure electric power, hydrogen fuel and high-efficiency engines," boasted Beijing Automotive Industry Holding Co. chairman Xu Heyi when he announced the company's future operating objectives at the Shanghai auto show.

Beijing's large-scale new-energy vehicle production base is being imitated in Chongqing and Jilin.

Low-price Disruption

China has actually adopted a two-pronged strategy to develop more energy-efficient vehicles, involving both international cooperation and domestic branding.

In the international sphere, it cooperated early on with international car vendors by trading market access for technology. More recently, in late May 2009, BYD signed a memorandum of understanding with Germany's Volkswagen to strengthen R&D cooperation in the area of hybrids and electric vehicles powered by lithium-ion batteries.

China's government also supports the development of indigenous brands. Chinese vehicle makers have taken advantage of the massive layoffs in the global automotive industry to hire design and global sales managers from the U.S. and Europe, while targeting domestic demand and export markets.

The reason so many Chinese manufacturers have flocked to energy-saving vehicles is because they have accurately grasped China's domestic car market, with sales of 10 million vehicles a year.

"In the next five years, if only 10 percent of all new cars sold are energy-saving vehicles, it will already be a huge commercial opportunity," says Geely chairman Li Shufu. Chinese automakers are honing their products in the domestic market, and once their technical and cost-control capabilities are mature, they will immediately turn their attention to the global market.

In developing alternative-fuel vehicles, China's many auto companies are focusing on a wide range of energy-saving technologies.

Geely Holding Group subsidiary Shanghai Maple Automobile Co., located in southern Shanghai on the border with Zhejiang province, has an annual production capacity equal to half of all the vehicles sold in Taiwan last year. Its production facility appeared quite busy when CommonWealth Magazine paid a visit at the end of April.

Cheng Huijun, head of Geely's secretarial office, was dripping with sweat while directing workers to park three methanol-powered cars outside the main entrance of the company's office building in preparation to welcome international guests.

"Lately, many foreign car distributors have shown a lot of interest in Geely's methanol-powered cars," Cheng said.

Most of the research at present, however, is directed at electric cars, a sector in which Chinese companies are typically engaging in disruptive innovation as they change the rules of the game. In this case, low-price disruptive innovation is already fermenting in China's electric vehicle market.

At the Shanghai auto show, compact car manufacturer Geely exhibited a fully electric Geely IG concept car that bears some resemblance to the small Smart car. Although it measures only 3 meters in length, this rather unremarkable orange vehicle contains China's unique brand of creativity.

The hood over the engine of the IG concept car is covered with deep blue solar panels, used to supply power to the vehicle's air conditioning system. The heat generated by the car's battery when it generates power is diverted to inbuilt heaters to keep motorists warm when driving in cold northern China.

Meanwhile, at Auto Shanghai, BYD showcased two dual-mode plug-in hybrid sedans – the compact F3DM and the mid-size F6DM, both of which can travel 100 kilometers in all-electric mode. It also unveiled its new all-electric model, the E6, which it intends to sell in the U.S. beginning in 2011.

"BYD has already sent an E6 to the U.S. by air so that Warren Buffett could drive it into his company's shareholders meeting," says BYD's Wang, referring to the world renowned investor, who acquired a nearly 10-percent stake in BYD through a Berkshire Hathaway subsidiary for HK$1.8 billion last September. 

As planned, Buffett drove into his Berkshire Hathaway shareholders meeting on May 19 in the E6. Unlike traditional fuel-powered cars that emit rumbling engine sounds, the E6 is noiseless and quietly rolled into the meeting venue.

When asked at a press conference about the BYD car's performance, Buffett described it as very good and praised BYD chairman and president Wang Chuanfu as the real star of the show.

BYD began as a producer of batteries for mobile phones and developed a deep understanding of the materials technology involved in battery manufacturing. In 1999, Wang Chuanfu established a BYD research institute, where a 1,000-member team conducts research on new battery materials and production techniques. "Finding ways to replenish energy is extremely critical," Wang Jianjun says.

Now, BYD is the only battery producer in the world capable of producing a finished vehicle.

Taiwan's Role in the Electric Car's Future

The key to producing electric cars revolves around having a strong command of battery production technology. Batteries used to power electric cars must withstand a challenging environment that features high temperatures, vibrations and high electric voltages, and Chinese companies have made advances in these areas.

"The manufacturing capability of Chinese electric vehicle batteries should not be underestimated," says Delta Electronics Inc. corporate vice president Simon Chang, who notes that aside from BYD, many other Chinese vendors have invested in electric car research. He believes this trend could benefit Taiwan.

"China's electric car market gives Taiwan's automotive industry its last chance to right itself," Chang contends. Taiwanese companies, he says, can participate in China's electric car revolution through cooperation with Chinese manufacturers.

Speed is the defining characteristic of Taiwan's IT sector, which can get a new product to market within three to six months on average. But the automotive sector usually takes three to five years to roll out new models after prolonged testing and verification periods. Taiwan's biggest niche in the alternative-energy vehicle market could be its fast turnaround time.

The ability to keep costs down will also define the future of the industry.

"Chinese people have everything. They just don't want to spend too much money," says Geely's Li in explaining the niche targeted by China's development of energy-saving vehicles.

China's automotive industry has begun to transfer its low-cost advantage to the new-energy vehicle sector in a bid to bring the elevated sticker prices of electric or alternative fuel vehicles down to more affordable levels.

Delta Electronics' Chang suggests that by 2020 electric cars will be cheaper than those powered by gasoline and believes that opens an opportunity for Taiwanese vendors.

"To provide for the demands of their own production lines, European, American and Japanese manufacturers are eager to cooperate with Chinese producers, who are striving for low costs. That's because foreign car manufacturers can't produce electric car components and assemblies that are both high quality and low cost. And that's where the opportunity for Taiwan lies," Chang says.

In this new wave of competition among Chinese car producers to develop energy-efficient vehicles, "Taiwanese companies must integrate with Chinese companies more quickly. The window of opportunity won't be open for long," Chery's Yin says, optimistic over the potential of future cooperation between Taiwanese and Chinese vendors in this new field.

Translated from the Chinese by Luke Sabatier

Chinese Version: 中國要做新能源車霸主