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Driving Large Scale Electrification of China's Automotive Industry

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China’s automotive industry is entering a period where discontinuities and disruptions are likely to reshape the competitive landscape - and this represents an opportune time to guide the development in alignment with China’s overall industrial development goals. With the issuance in April 2017 of the Automotive Industry Mid to Long Term Development Plan, the Ministry for Industry and Information Technology (MIIT) provides “guiding principles” for the development of China’s auto industry for the next decade.

Leveraging new energy and connected vehicle technology as entry points for accelerating auto industry development and transformation, the policy’s objective is to transform China from the largest auto market to a global leading automotive production base. Specifically, the guideline sets a goal for Chinese new energy vehicle (NEV) companies to be among the Top 10 NEV companies worldwide by 2020, and to further expand their global impact and market share by 2025. A target has been set for the domestic NEV sales to reach 2 million units by 2020, and 7 million units by 2025 (20% of total vehicle sales).

Chinese automakers have struggled to reach a global leadership position in the automotive industry due to their relatively short history and lack of technical experience in advanced automotive technologies centered on the internal combustion engine. The NEV market opens a window for China to potentially level the playing field and assume a more competitive position versus the global industry, as multi-national players have not yet established a sustainable market leadership position.

Published in: Automotive
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Driving Large Scale Electrification of China's Automotive Industry

  1. 1. Driving Large Scale Electrification of China's Automotive Industry Bill Russo Chee-Kiang Lim Alexander A. Loke May 2017 © 2017 Gao Feng Advisory Company
  2. 2. Introduction China’s automotive industry is entering a period where discontinuities and disruptions are likely to reshape the competitive landscape - and this represents an opportune time to guide the development in alignment with China’s overall industrial development goals. With the issuance in April 2017 of the Automotive Industry Mid to Long Term Development Plan, the Ministry for Industry and Information Technology (MIIT) provides “guiding principles” for the development of China’s auto industry for the next decade. Leveraging new energy and connected vehicle technology as entry points for accelerating auto industry development and transformation, the policy’s objective is to transform China from the largest auto market to a global leading automotive production base. Specifically, the guideline sets a goal for Chinese New Energy Vehicle1 (NEV) companies to be among the Top 10 NEV companies worldwide by 2020, and to further expand their global impact and market share by 2025. A target has been set for the domestic NEV sales to reach 2 million units by 2020, and 7 million units by 2025 (20% of total vehicle sales). Chinese automakers have struggled to reach a global leadership position in the automotive industry due to their relatively short history and lack of technical experience in advanced automotive technologies centered on the internal combustion engine. The NEV market opens a window for China to potentially level the playing field and assume a more competitive position versus the global industry, as multi-national players have not yet established a sustainable market leadership position. 1 New Energy Vehicles include Plug-in Hybrid (PHEV) and Battery Electric Vehicles (BEV) © 2017 Gao Feng Advisory Company
  3. 3. © 2017 Gao Feng Advisory Company Driving Large Scale Electrification of China's Automotive Industry 3 China aims to develop a new automotive ecosystem and supply chain around NEVs, with a focus on battery cell, battery management system (BMS), and electronic control system technology. The goal is to gain a leadership position for development of the critical technologies that power the 21st century auto industry. Central to the commercialization of new energy vehicle technology is the advancement of lithium-based battery technology. Lithium battery technology development has significantly accelerated over the past decade, with improvements in energy density and power, with decreasing costs as production scale expands. Increasing adoption of NEVs for personal use as well as higher penetration of electric vehicles in mobility services and other commercial fleet applications (bus, taxi, and other light commercial vehicle) will continue to drive A Path to Electrification of the Automotive Industry scale economies and contribute to further cost reductions. Making NEVs a central pillar of China’s industrial policy will help sharpen the R&D focus on the technological breakthroughs needed to resolve the remaining barriers to commercialization. As the NEV market develops beyond its start-up phase, battery suppliers will emerge and further expand their investments in R&D. Battery costs, which represent the biggest cost component of an NEV (~30-40%), have been steadily declining as the technology advances and demand rises (see Figure 1). Industry experts forecast that the cost of ownership for NEVs may achieve parity with conventional ICE vehicles by 2025. In addition, consumers will increasingly consider purchasing NEVs as charging and service infrastructure become more widely available. Prices are already in the range of USD 200-250 per kWh for leading NEVs and are expected to drop below USD 120 kWh within a decade. Figure 1. Forecasted Cost for Lithium-based Battery Packs (Actual averages 2010-2015, Estimated range 2015-2030) Source: Bloomberg New Energy Finance, Tesla, Expert Interview, Gao Feng Analysis
  4. 4. © 2017 Gao Feng Advisory Company 4 Driving Large Scale Electrification of China's Automotive Industry While battery cost poses a significant challenge to mass commercialization, several additional challenges must also be addressed: 1. Capacity and power suited to the required duty cycle; 2. Safety and chemical stability for both routine and exceptional circumstances including normal use, charging, and accidents. Incidents involving the latter case, if handled poorly, can have a disastrous impact on the image of NEVs; and 3. Charging speeds and recharging infrastructure availability which determine suitability for various mobility applications. Battery Development Trends EV manufacturers must balance several supply and demand side factors when designing a battery powered vehicle. On the demand side, they must consider the driving environment, charging infrastructure, typical duty cycles and driving range. On the supply side, the manufacturer must choose a suitable battery chemistry, packaging solution, thermal management system, battery management system (BMS), and charging system that delivers the appropriate cost suitable to the customer’s needs. Let’s explore the state of development for each of these factors. Battery chemistry The choice of battery chemistry is a determining factor for the overall electric vehicle cost, performance, and range. There are many lithium-based battery chemistries in the market today (see Figure 2), and suppliers and manufacturers often create different variations to suit their specific needs. Chemistries such as Lithium Iron Phosphate (LFP) are relatively inexpensive to produce and offer better safety and longer life span, but lack performance and capacity. This could be better suited in markets where cost is a key consideration, or where driving habits don’t require the additional range and power. Other chemistries such as Lithium Nickel Manganese Cobalt Oxide (NMC) offer very good overall performance in terms of capacity and available power, but are more costly to manufacture (driven mainly by raw material prices). Manufacturers are looking past these near-term commodity price issues and are generally favoring NMC blends going forward.
  5. 5. © 2017 Gao Feng Advisory Company 5 Other promising newer technologies such as Lithium-air and solid-state batteries are evolving rapidly and major players and institutions have invested heavily in their R&D. These chemistries promise to greatly affect the NEV industry by offering more capacity and power, as well as increased safety. On top of that, these newer chemistries will allow manufacturers to further optimize the overall performance of their vehicles. However, these advanced battery technologies may take several more years to reach the commercialization stage as they are still years from being production-ready. Taking new breakthroughs from laboratory to market would require moving from scientific research through small-scale testing, to creating proof-of- concept prototypes before full-scale production is possible, a process that typically can take 7-10 years. Therefore, Lithium-ion based battery chemistry will continue to be state-of-the-art for production cars through 2025. Driving Large Scale Electrification of China's Automotive Industry Figure 2. Overview of Major Lithium Battery Chemistries Source: Literature Research, Gao Feng Analysis
  6. 6. © 2017 Gao Feng Advisory Company 6 Packaging Packaging is also a major consideration for NEV development, as the ability to pack more battery cells into a vehicle can help to increase power and energy storage capacity. Several packaging methods can be used to increase cell count, volume and density. Manufacturers are also trying to use common battery modules across their model range to reduce cost. While good for performance, more battery cells also require additional space and add cost and weight to the vehicle. As a result, NEV manufacturers (such as Tesla) are designing the vehicle from the ground-up to optimize the placement of the cells and package more energy, while lowering the center-of-gravity. This helps to improve the dynamic ride & handling performance of the vehicle without sacrificing the vehicle’s interior space. Volkswagen’s all-electric MEB platform is designed to increase driving range while providing a comfortable interior space with outstanding ride & handling. The flat-floor battery packaging approach effectively reduces the turning radius of the vehicle, providing a more suitable solution for city use (which is the currently the primary use case for NEVs). Thermal Management Optimizing battery life and performance over the electric vehicle life cycle requires good thermal management. Storage and transfer of electrons using a battery cell is a chemical process that is most efficient within a temperature range from -10 to 30ºC2. 2Lithium Ion Batteries Can’t Stand the Heat, John Gartner, June 2012 http://www.plugincars.com/lithium-ion-batteries-can’t-stand- heat-122447.html Temperature also plays a big role in battery safety, and designers typically incorporate heating and cooling elements in battery packs to manage the pack within a desired temperature range. Thermal management is particularly important when fast charging or other forms of high-voltage energy transfer methods are employed. However, thermal management adds additional cost and packaging space to the overall EV subsystem. Many manufacturers use passive thermal management in less demanding applications for entry-level EVs, while active thermal management is more widely- adopted in more premium EVs. Battery Management System The Battery Management System (BMS) is the ‘central nervous system’ of an electric car. The BMS directly influences the performance and design of the entire EV subsystem. Compared with other components in the control system, the BMS has experienced the largest technology discontinuity and provides the most direct means to differentiate vehicle performance. There are three observed trends for the BMS: 1. Usage of active balancing topologies which manage charging, discharging, and utilization profiles of a specific group of cells; 2. Higher cell counts in software and hardware systems to work with larger capacities and higher voltage cells, in addition to creating a dynamic array of battery cells that allow the BMS to configure the batteries for more capacity or more power based on the duty cycle; and Driving Large Scale Electrification of China's Automotive Industry
  7. 7. © 2017 Gao Feng Advisory Company 7 3. Miniaturization of the BMS to create smaller and more integrated systems to relieve space requirements to increase the energy density of the final pack. Charging A major limiting factor to the adoption of NEVs is the required charging protocol for the vehicle. A common concern among prospective buyers is the range of the car and whether it can be easily and conveniently “refueled” without significant downtime. Options that NEV manufacturers are considering include high-voltage DC charging to increase charging efficiency and ultimately speed up the charging process. However, current fast-charging procedures place additional stress on the battery cells which can degrade battery performance over its life cycle. Over the next decade, experts agree that fast charging technology will be able to fully charge a battery electric vehicle with a 600km range in under 10 minutes. Other solutions such as inductive wireless charging technologies that are fully integrated into a charging infrastructure could eventually eliminate the need for a full recharging cycle with associated downtime. Wireless charging is also well suited for fleet applications with pre- defined routes. Cities with a wireless charging infrastructure may open an entirely new path to the electrification of their transportation services fleet. China’s NEV Battery Localization Plans The China government exerts a heavy hand in guiding the market toward electrification through regulations and policies that encourage NEV production, localization of battery cell sourcing, and by providing market incentives. There are already many battery suppliers in the China market with varying levels of maturity. While many global automakers depend on global suppliers for technology and innovation, several global and local automakers are investing in NEV localization and the supplier landscape is rapidly evolving. Global lithium-ion battery production is expected to expand over 500% between 2016 and 2020. By 2020, mass production of the majority of Li-ion batteries will be concentrated in just four countries, with China being the largest (see Figure 3). To accelerate this development, the China government has established a set of comprehensive framework that includes: 1. Setting aggressive targets of 2 million units sold by 2020, and 7 million units by 2025, along with planned expenditure of CNY 63B by 2020; Driving Large Scale Electrification of China's Automotive Industry
  8. 8. © 2017 Gao Feng Advisory Company 8 2. Higher technical requirements and incentive schemes to support achievement of technological breakthroughs, such as driving range, battery longevity, safety and maintenance standards; 3. Require sourcing from China’s approved battery suppliers for NEV OEMs to be qualified for the approved NEV catalog and to receive subsidies; 4. Push deployment of NEVs in the publicly-owned and commercial fleet segments to accelerate scale- up, including: Driving Large Scale Electrification of China's Automotive Industry Figure 3. Global lithium-ion battery production is expected to expand over 500% between 2016 and 2020 Source: Benchmark Mineral Intelligence, Literature Research, Gao Feng Analysis a. requiring newly purchased vehicles in publicly-owned fleets to comprise of 50% NEVs (this includes public transportation buses to meet 30% - 80% in specific provinces b. granting favorable tax and licensing benefits for NEV purchases; and 5. Commitment to deployment of an extensive charging infrastructure to support mass adoption of NEVs.
  9. 9. 9 © 2017 Gao Feng Advisory Company With such strong policy support from the China government, manufacturers are increasingly collaborating with local players, and several are revisiting their global procurement strategies as China sourcing may offer compelling scale and cost advantages as the battery technology matures and becomes commoditized. Many multi-national brands are developing and producing batteries in collaboration with global EV ecosystem partners. For example, Tesla is working closely with Panasonic and GM works with LG Chem. Driving Large Scale Electrification of China's Automotive Industry Figure 4. Collaborative Ecosystems among Premium and Volume Brands (Illustrative) Source: Expert Interviews, Literature Research, Gao Feng Analysis Collaborative partnerships among premium and volume car brands are also being explored to balance technology and cost competitiveness. For example, premium carmakers BMW and JLR are exploring a partnership with Ford to build a joint battery plant. Driving scale through collaboration among premium and volume brands can allow carmakers to reach a competitive cost structure for battery sourcing (see Figure 4).
  10. 10. 10 © 2017 Gao Feng Advisory Company Anchoring competitiveness in the EV market will require four capability sets: 1. Vehicle systems integration: an ability to integrate and package the overall propulsion system into the vehicle in a manner that optimizes performance and ride & handling; 2. EV subsystem integration: selecting and integrating the battery cells, the battery management system and motor technology that delivers the propulsion solution that fits the duty cycle of the use case of the car; 3. Battery cell technology: a solution that balances energy requirements, capacity, and cost, in line with the usage requirements of the vehicle; and Conclusion Driving Large Scale Electrification of China's Automotive Industry 4. Battery management systems: as the central nervous system of the car, the BMS must manage the overall performance of the EV subsystems while monitoring and ensuring that the key performance measures are monitored and effectively managed The EV market is evolving rapidly in China and the competitive landscape is still in its early stage of development. As China turns its focus to rapidly expanding its EV market and manufacturing capabilities across the value chain, it is an opportune time for global automakers to determine how to develop and build their supplier ecosystem to effectively compete in this market.
  11. 11. 11 © 2017 Gao Feng Advisory Company Driving Large Scale Electrification of China's Automotive Industry Alexander A. Loke is a Consultant at Gao Feng Advisory Company based in Hong Kong. He is a core member of the Gao Feng Auto practice, focusing on new energy vehicles, ecosystem design, and the new automobility competitive landscape. He has worked with multinational organizations across the Chinese Mainland, the United States and Hong Kong. Bill Russo is Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an automotive executive, including 13 years of experience in China and Asia, Mr. Russo has worked with numerous multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. He was previously Vice President of Chrysler North East Asia, where he managed the business operations for the Greater China and South Korea markets. Prior to this, Mr. Russo was Head of Product & Business Strategy for Chrysler. He also has nearly 12 years of experience in the electronics and IT industry, having worked at IBM Corporation, and formerly served as Vice President of Corporate Development at Harman International. Chee-Kiang Lim is a Principal at Gao Feng Advisory Company. He has over 20 years of experience, including 12 years of consulting experience in strategy development and operational improvement for large multinational corporations. His consulting work is focused on digital disruptions to traditional industries including automotive, insurance and energy sectors. He has also advised the Singapore Government on its Smart City strategy and implementation, and has deep expertise in the oil & gas, mining and high-tech industries in China, Southeast Asia and Australia. He has previously worked in telecoms and high-tech start-ups in the Boston area and in the Administrative Service of the Singapore Government. About the authors
  12. 12. Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and management consulting firm with roots in China coupled with global vision, capabilities, and a broad resources network. We help our clients address and solve their toughest business and management issues -- issues that arise in the current fast-changing, complicated and ambiguous operating environment. We commit to putting our clients’ interest first and foremost. We are objective and we view our client engagements as long- term relationships rather than one-off projects. We not only help our clients “formulate” the solutions but also assist in implementation, often hand-in-hand. We believe in teaming and working together to add value and contribute to problem solving for our clients, from the most junior to the most senior. Our senior team is made up of seasoned consultants previously at leading management consulting firms and/or ex-top executives at large corporations. We believe this combination of management theory and operational experience would deliver the most benefit to our clients. Our name Gao Feng is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie. Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity. We believe that this principle lies at the core of management consulting – a truly trustworthy partner who will help clients tackle their toughest issues. © 2017 Gao Feng Advisory Company For More Information: Bill Russo Managing Director Gao Feng Advisory Company bill.russo@gaofengadv.com Chee-Kiang Lim Principal Gao Feng Advisory Company ck.lim@gaofengadv.com Alexander A. Loke Consultant Gao Feng Advisory Company alexander.loke@gaofengadv.com

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