The proverb goes that when China coughs, the world catches the flu. The unprecedented economic development of the world's most populous country has led to a steep increase in national and personal wealth. An obvious beneficiary of economic growth is the automotive industry. Car ownership has grown to almost 58 per 1000 citizens and, currently, approximately 340 million vehicles are on Chinese roads, including 250 million cars.
China's policies regarding its domestic automotive industry will have a profound effect on national and international suppliers. Beijing intends to replace its internal combustion powered car fleet by 2050. The gradual shift will significantly impact two industries: the automotive and energy sectors.
Beijing's motivations
The historical economic development of China has led to industrialization and a severe pollution problem. The Chinese population is becoming increasingly vocal in its displeasure vis-á-vis the Communist party regarding the state of the environment. Beijing, therefore, has announced a 'war on pollution'' to clean the sky, soil, and water towards acceptable levels. Phasing out conventional vehicles in favour of new technologies such as EVs fits into this agenda.
Furthermore, Chinese policymakers also intend to improve the Asian country's energy security. China surpassed the U.S. in 2017 to become the largest importer of oil in the world. Despite the focus on EVs and other technologies, most cars are still powered by petroleum products. Dependence on foreign producers is a significant risk due to severe price hikes and supply disruptions. Related: Hong Kong Billionaire Loses $20 Billion In Canadian Oil Sands
Technological leadership is also on Beijing's mind. The 'Made in China 2025' strategic plan highlights the need to become a vital producer of the technologies of the future, which includes EVs. According to Hidetoshi Kadota of Nissan Motor, "production of EVs without Chinese-made parts is already no longer possible." By reducing the incentive for conventional cars, Beijing intends to motivate companies to start investing in new technologies to power 'China's national policies.
The implications
Currently, automobiles account for 42 percent of China's oil consumption. Reducing the use of petroleum products will significantly impact the global oil sector. According to researchers at Stanford University, peak oil will occur around 2035, after which consumption will decrease gradually. The replacing of China's conventional vehicles by EVs or hydrogen fuelled vehicles will impact global consumption. Therefore, peak oil could come earlier than anticipated.
The shift towards competing technologies is already impacting alternative sectors such as the mining industry. The production of batteries require large volumes of, amongst other, lithium and cobalt, which can be found in a limited number of countries. Increasing demand could push up prices.
Besides the obvious economic consequences, China could also become more engaged on a political level. To secure a steady flow of resources, Beijing's presence in resource-rich countries will grow comparable to its interests in the oil industry.
From planning to execution
The sheer size and importance of the automotive industry in China require a meticulously planned transition. The disparity between the level of economic development of the coastal regions compared to less developed areas such as the western province of Xinjiang, adds another layer of complexity.
These and other challenges complicate China's ability to leapfrog into the 21st century with new technologies. Beijing will, therefore, probably maintain a multi-tiered phase out plan under which regions and cities are divided into four tiers based on economic development and level of pollution.
First, in line are the big metropolises with a severe pollution problem and substantial economic output. Second, regional capitals and cities in China's 'Blue Sky 'War' areas could receive the necessary attention such as Xi'an, Chongqing, and Chengdu. Lastly, it will be the turn of the economically less essential and sparsely populated regions such as Tibet.
China's island province Hainan has already become a green pioneer with extended plans to transform its car fleet. The area plans to phase out conventional cars entirely by 2030. However, it is highly unlikely that the mainland will follow suit due to the size of the country.
By Vanand Meliksetian for Oilprice.com
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