Ponzis and Electric Vehicles - Pt II
China's impressive EV ponzi program and emerging imitations
In Part I we looked at what constitutes a new-age ponzi. New-age, because they’re not necessarily fraudulent, illegal, nor guarantee riches for little risk. The potential riches (returns) are within the realm of the level of risk involved. But. They do share two key characteristics with the original ponzi we’re more familiar with:
the constant influx of new funds needed to sustain the gig
the constant signaling of promises and potential returns one should expect if the ponzi were to succeed
These new-age ponzis, however, actually have a chance to reach what we’ll call “escape velocity," or the point in which the business becomes self-sustaining.
Today we’ll look at one of these success stories. It’s not one you’re familiar with, but one that has enormous implications for the future of government-funded ponzis as the model is starting to be replicated by other nations at scale.
This is a story all about how China’s Ten Cities, Thousand Vehicles program flipped the ponzi upside-down.
Electric Vehicle adoption suddenly exploded after several years of trial-and-error, refinement, massive subsidies and benefits. Today the growth is largely organic and self-sustaining, with the US attempting to replicate the model at home within the Hydrogen and Carbon Capture industries.
China’s politically-motivated push for EV adoption
Real quick it’s important to understand some of the “whys” behind China’s plunge into developing its EV market. The program it pursued was a very rocky one, and at many points in the process the outlook of its success looked far from promising. The following underpins the “why” behind their initial push for EV adoption in the late 90s (!) and its relentless persistence in the face of adversity.
it was falling behind the world in traditional gas-powered vehicles, so an EV-focused China could bring in more economic activity to the country
It needed to reduce its dependence on oil, which comes primarily from the Middle East on routes controlled by U.S. Navy - its source of coal and gas for electricity however, is relatively diversified
Pollution in urban cities need to be mitigated - people need to wear masks (pre-COVID) in certain cities because of the density of the pollution
it’s worth mentioning that 3/4 of electricity comes from coal-fired plants, so shifting from gas-powered to electric vehicles will only reduce GHGs by 19%. But. It would shift the source of smog from exhaust pipes to power plants, which are located outside urban areas. So EVs are a great solution for unhealthy city pollution, especially as the nation begins to decarbonize its grid.
China’s First Push for EV Adoption
China first went with a general direct-subsidy program for taxis and government agencies that purchased an electric vehicle. The goal was to drum-up initial demand for EVs, with hopes of achieving nation-wide adoption overtime.
Quickly China realized this was highly inefficient. Subsidies were given, but no wealth was created. The program did not incentivize infrastructure such as charging stations, supply chain procurement, large-scale manufacturing facilities, or even tech advancements. It was simply money down the drain.
A market does not broadly adopt a new technology through artificial means (i.e subsidies). This demand is temporary. New tech (EVs) is adopted when it becomes a superior alternative to the traditional tech (Internal Combustion Engines, ICEs). So until people want to purchase EVs due to their superior benefits, the program is still a ponzi generating artificial demand through government subsidies, and is at risk of falling apart when those subsidies dry up.
This is not the path to long-term sustainability. The point of these new-age ponzis is to eventually make them self-sustaining. China realized a broad subsidy was not going to work, and the program needed an overhaul.
Ten Cities, Thousand Vehicles
Genius in hindsight - uncertain, ambitious, and risky in foresight.
Here are the key drivers leading to the eventual adoption of Electric Vehicles in China, in chronological order:
1. Broader National Policy Established
First, China needed to emphasize the importance of “New Energy Vehicle” (NEV) adoption. President Hu in 2009 outlined the overall plan and framework, but Xi took it to the next level in 2012, saying that NEV adoption is the only way to take China’s automotive industry to the next level. He made NEV development an official national strategy, which is a big deal in directing policymakers’ focus, and targeted an ambitious 1,000,000 EVs on the road by 2015, and 5,000,000 by 2020.
In 2009, 10 cities were chosen and targeted 1,000 new electric vehicles in each city, every year, for 3 years. The cities must submit a detailed plan in order to qualify for these subsidies.
Though the policy was initially established by Hu, he emphasized its importance in relation to the reduction of emissions. It wasn’t until Xi’s reign in 2012 that the narrative began to shift.
To Xi, the vision for EV development and adoption was about improving the structure of its growing automotive prowess, developing supply chains and maintaining international competitiveness. To Xi, it was about getting ahead of the world in this new technology.
2. Evolution of Policies
By 2015, EV targets established by National Policy were not hit. In fact, barely 50% of the target was reached.
After analyzing progress and pitfalls, they realized the biggest detriments to local-adoption was low battery ranges, lack of charging stations, low manufacturing capacity and lack of focused subsidies.
Key policy initiatives were therefore implemented to further tech and infrastructure advancements, which turned out to include an inherent Game Theory component to it.
A. Fuel Efficiency
Progressive tightened fuel efficiency standards required for ICEs was a key driver in advancing EV tech and infrastructure. In 2015, a target was set to increase fuel efficiency to 48 mpg by 2020, which was the most ambitious fuel efficiency target in the world. It put manufacturers under immense pressure to achieve these targets. In an effort to incentivize EV manufacturing and not just deter inefficient ICE production, the policy added that one Electric Vehicle would count as multiple zero-fuel consumption vehicles. It was first equivalent to 5 zero-fuel consumption vehicles in 2016, then phased down to 3 in 2018-19, then 2 in 2020. Another mandate in late-2018 was implemented for manufacturers to produce a certain % of their fleet as EVs.
Shifting costly supply chains and processes over to EVs on a whim would be extremely costly. So to not “punish” manufacturers through this forced shift, central subsidies were put into place to assist their transition.
B. Vehicle and infrastructure subsidy scaling
Subsidies began in 2009 but were refined later on to target certain areas of growth that were identified as a hinderance to the overall ambitions. Subsidies in 2015 started being scaled based on electric drive range.
Officials realized the lack of adoption was not only due to low manufacturing capabilities, but from people with range anxiety as well. The fact that EVs could travel less than 80 kilometers was a major hindrance to adoption. On top of that, there was a severe lack of electric charging infrastructure. Who wants to be stranded within hundreds of miles of the closest refueling station?
So in 2015, EVs must have a minimum range of 80km to qualify for a subsidy. EVs with 80km of range qualified for $5,000 subsidy, while 200km ranges qualified for over $7,200. The amounts were scaled back year after year, disincentivizing low-range batteries and promoting tech advancements in battery efficiency. No one can sit back and collect subsidies - work and innovation was encouraged and rewarded.
For manufacturers to qualify for these subsidies, cities had to meet certain electric charging infrastructure requirements. Government would also support cities with additional subsidies if the amount of EVs on the road reached a certain threshold.
SUBSIDY GAME THEORY
Game theory has entered the stage, and many layers to this ponzi begin to set up the launch pad for EV growth.
Car manufacturers are hit with a mandate pushing them to manufacture EVs
They don’t qualify for subsidies unless the city they’re in builds out a certain number of EV charging stations
Cities need the car manufacturers to remain in those cities - they drive immense economic activity
Cities would only qualify for charging station subsidies if EVs on the road meet a certain number
The relationship between manufacturers and cities incentivize both to work together that results in a virtuous cycle of tech advancement, profitability, and eventual adoption
BACK UP: See how much work it is forcing an unnatural technology onto people! Free markets could’ve done this better. Some would argue though that the necessary environment for free markets to take over EV adoption would’ve taken at least several more years to emerge.
As policies take its course, identifying and implementing solutions to the gaps that emerge as a result of the targeted subsidies is the best way to advance the ponzi. Free markets would have naturally filled in these gaps if the transition were organic. If China had not successfully identified these gaps (which it came close to in 2015), subsidies would’ve drained the state of its funding capacity and have nothing to show for it.
3. City-specific incentives
Over half the growth in China’s EV market can be explained by direct purchase subsidies. The remaining can be attributed to non-direct subsidies, the most prominent being the License Registration Incentive.
Many cities impose an annual quota on license registrations to reduce congestion and air pollution. These quotas could be reached as early as June of each year, and has driven the cost to license a vehicle extremely high. One policy that was implemented among densely populated cities was to waive this quota for all EV owners. They could receive a registration whenever they’d like, and wouldn’t have to pay the absurd fee either.
This didn’t solve the issue of congestion however, so another policy was implemented to only allow license plates ending in certain characters to drive on certain days, but EV owners could drive whenever they’d like. Other local-level policy adjustments such as free parking for EV owners pushed more consumers to opt for EVs vs. the traditional ICE.
A delicate dance was at play which resulted in China blowing past its 2020 goal originally set over 10 years ago. The policy adjustments in 2015 has juuust enough subsidies and regulation for various players to push adoption. Too much subsidies/little regulation and there would have been no chance of identifying the potential roadblocks to widespread EV adoption - there would be too much funds for consumers to care about battery range or manufacturers to care to improve technology. Too little subsidies/much regulation would’ve led to manufacturers and cities not developing EV tech and infrastructure altogether.
Twas’ quite a rocky road filled with nuance to escaping the EV ponzi. Though not fully out of the woods yet, the trends suggest it’ll get there soon.
China now looks to implement a similar program for adopting Hydrogen and fuel cell vehicles, unveiling a “Hydrogen City Clusters” program in 2020 very similar to “Ten Cities, Thousand Vehicles.”
The U.S. is taking a page from their book, which in the infrastructure bill includes plans to fund and establish 4 Hydrogen City Hubs to push adoption and potentially become a leader in Hydrogen tech.
A post for another day!
I’m curious to hear what you think. Can a “city clusters” model like this succeed for the Hydrogen industry in China or the U.S.? Does China have some sort of advantage over other countries in achieving its goals?