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DE RUEHGZ #0314/01 1410823
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R 210823Z MAY 09
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UNCLAS GUANGZHOU 000314 
 
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STATE FOR EAP/CM, EEB/TRA, INR/EAP 
STATE PASS TO USTR CHINA OFFICE 
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USDOE FOR INTERNATIONAL AFFAIRS 
USDOE FOR FOSSIL POLICY AND ENERGY 
 
E.O. 12958: N/A 
TAGS: EFIN ECON SENV PGOV CH
 
SUBJECT: Green Cars: Could Guangdong Help China Become a Global 
Leader? 
 
REF: A) Beijing 1339; B) Beijing 0151 
 
¶1.  (U) Summary: China has set its sights on becoming one of the 
world's leading producer of hybrid and pure-electric cars by 2011. 
Guangdong's BYD Auto Company may lead China toward that goal; it has 
impressive technology, a hybrid model on the market and an electric 
vehicle scheduled for production this year.  A lack of supporting 
infrastructure and low levels of public enthusiasm could - likely 
will - hold back the growth of "green" cars domestically.  However, 
investment from Warren Buffet and a highly popular showing at the 
recent Detroit Auto Show has the international community abuzz with 
the possibility of BYD becoming a major competitor.  End Summary. 
 
------------------------------ 
BYD Shakes Up Green Car Market 
------------------------------ 
 
¶2. (SBU) BYD Auto Company looks like it's about to take the global 
"green" auto sector by storm.  In December 2008, BYD, based in 
Shenzhen, Guangdong province, began production on the world's first 
commercialized dual mode plug-in hybrid electric vehicle (PHEV), the 
F3DM, which was showcased at the 2009 North American International 
Auto Show in Detroit.  Staying ahead of the curve, BYD also recently 
unveiled its pure electric concept car, the e6.  According to Henry 
Li, General Manager of BYD Auto's Export Trade Division, the e6 has 
moved into the preproduction phase; and full production of the car 
will start this year.  The firm claims the e6 consumes less than 18 
kWh of power per 62 miles, and can achieve top speeds of 100 mph. 
Its range, more than 249 miles, is the longest in the world for its 
class of car; comparatively, the Nissan EV-02 (available in the U.S. 
in 2010) has a range of 190 miles and the Tesla Roadster has a range 
of 200 miles. 
 
¶3. (U) Established in 1995, BYD Company Limited is a newcomer to the 
auto industry.  A major player in the world battery industry, BYD 
has 65% and 30%, respectively, of the global markets for nickel and 
lithium-ion cell phone batteries.  In 1996, BYD expanded its R&D to 
include research on the development of electric vehicle batteries. 
It didn't establish BYD Auto until 2000 and acquired Shaanxi 
Qinchuan Automobile Company, a defunct state-owned enterprise in 
¶2003.  In September 2008, Warren Buffett's MidAmerican Energy 
Holdings Co. invested USD 230 million in BYD, taking a 10% stake in 
the company. 
 
----------------------------------------- 
Moving the Industry Toward Green Vehicles 
----------------------------------------- 
 
¶4. (SBU) China's gas-powered auto industry enjoyed record sales in 
the first-quarter of 2009 (REF. A), due in part to the Central 
Government's automotive stimulus plan released in March.  Li told us 
that, in spite of this growth, there is little future potential in 
the development of gasoline-powered cars; automakers might hope to 
increase fuel efficiency by 3-5%, but beyond that the technology is 
simply stagnant.  Li said that China's future global competitiveness 
would come from its ability to rapidly shift its focus to future 
technologies, such as biofuels, hybrids, and fully-electric vehicles 
(EVs).  He believes China already has a head start over the United 
States, Japan and European automotive companies. 
¶5. (SBU) BYD is looking to enter the U.S. market with its hybrid 
vehicles in 2010.  The F6D3 dual mode model is set to hit the U.S. 
market in 2011.  Subsequently, the e6 is expected to be released 
ahead of electric vehicles in preproduction by rivals Honda and 
Nissan.  With the new investment from Warren Buffett, Li tells us, 
BYD hopes it has cracked the door open to smooth market entry.  Wang 
Chuanfu, Chairman of BYD Auto, said that BYD will become China's 
largest automotive manufacturer by 2015, and the global leader by 
¶2025.  While that goal may yet prove elusive, BYD appears well 
positioned to vie for leadership in the global market for electric 
cars.  Recent car sales have seen a 118% increase from last year, 
propelling the young automotive company from 14th to 7th in domestic 
auto sales. 
 
--------------------------------------------- ------ 
 
Competitive Edge: Battery Technology and Production Scheme 
--------------------------------------------- ------ 
 ¶6. (U) One of the competitive advantages that BYD has is its 
expertise in the battery market, the key component in an electric 
vehicle.  The e6 is powered by BYD's Fe battery, a lithium-ion 
battery using iron-phosphate, which is more cost efficient and 
chemically stable compared to conventional cobalt-based lithium-ion 
batteries.  According to the firm, the Fe battery can be charged to 
50% of its capacity in ten minutes; the remaining 50% takes hours to 
charge.  In addition, the Fe battery maintains 80% of its initial 
capacity after being charged and fully discharged through 2000 
cycles.  The battery is likely to last 7-10 years, which eliminates 
the need to replace it during the normal life of the vehicle. 
 
¶7. (SBU) The second competitive advantage that BYD has over its 
competition, according to Li, is its "vertical production."  The 
firm has invested in R&D and centralized manufacturing so that the 
majority of its hybrid and electric car parts are produced and 
assembled in-house, rather than sourced from a variety of suppliers. 
 Moreover, electric cars require much less assembly because there 
are few parts; the e6 model is composed of 210 parts; in contrast, a 
normal gas-powered car has thousands of parts; an electric motor has 
30 parts, while a gas motor has 600. 
-------------------------------------------- 
Challenges Facing China's Green Car Industry 
-------------------------------------------- 
 
¶8. (SBU) Safety, affordability, and practicality are the main 
challenges to the development of the electric car industry in China, 
according to Li.  With regard to safety, Li pointed out that the 
general public was not altogether enthusiastic about a 
battery-powered car, citing recent battery explosion incidents.  BYD 
acknowledges that it still needs to correct some of its 
battery-related quality control issues.  On affordability, Li said 
that the cost of an electric car in China was not likely to fall 
below gas car prices in the near future.  However, he commented that 
the cost (as was true of cell phones and computers) was likely to 
decrease over the long-term as technology develops further. 
¶9. (SBU) Despite all of the hype surrounding the unveiling of BYD's 
hybrid vehicles, as of April, BYD had only sold 80 F3DM cars, 
according to media reports.  Li blames a lack of public charging 
stations which has made BYD's "green" cars rather impractical for 
many urban consumers.  While the e6 can be charged via a household 
plug, most urban resQents live in apartment buildings, without 
access to individual, outdoor outlets.  In the absence of 
appropriate infrastructure, buyers worry about running out of 
electricity on the road.  On the flip side, Li said charging 
stations would not likely spring up without public enthusiasm and a 
certain level of sales.  According to media reports, the Central 
government is encouraging provincial and municipal power grids to 
construct charging stations. 
 
--------------------------------------------- ---- 
The Stimulus Plan: Central and Provincial Support 
--------------------------------------------- ---- 
 
¶10. (U) The State Council's automobile stimulus plan, which covers 
2009-2011, aims to achieve domestic auto sales of 10 million units 
by the end of 2009 (REF. A).  Within this plan, the Central 
Government has set a target of increasing the annual production of 
alternative energy vehicles to 500,000 units by the end of 2011, 
amounting to 5% of all passenger cars produced.  That would mean a 
twenty-fold increase from the 21,000 alternative vehicles China 
produced last year.  In addition, the government will allocate RMB 
10 billion (USD 1.4 billion) for the promotion of technology 
innovation over the next three years.  Mindful of cost-conscious 
consumers and current economic conditions, the Central Government 
plans to further stimulate growth in the industry by subsidizing the 
sale of electric cars by up to 80%. 
 
¶11.  (U) According to Li, it is not clear how auto companies will 
further benefit from stimulus directed toward alternative energy 
cars.  BYD currently receives a nominal tax credit for each hybrid 
car it sells.  With regard to investment in technology innovation, 
 
Li says that obtaining government funding for private company R&D is 
complicated and will be easier for government-owned automotive 
companies such as Dongfeng Motors.  As a private company, Li said 
that BYD should not plan its long-term development based on 
government support. 
 
¶12. (U) As part of the "Guangdong Province Development Plan for 
Automotive Industry, 2005-2010," Guangdong aims to implement clean 
action vehicle programs in several cities and encourage the use of 
cleaner fuels and electric vehicles, according to media reports. 
Shenzhen will be one of 13 cities nation-wide to participate in a 
pilot "green car scheme" to increase the sale of alternative cars. 
Under the scheme, the public sector is encouraged to procure hybrid, 
electric, and fuel-cell vehicles relying on government subsidies of 
up to RMB 600,000 (USD 88,235).  (Note: The cost of hybrid vehicles 
makes it difficult for the government to extend this incentive to 
private individuals.  End Note.)  Li tells us that much of the 
initial interest in BYD's hybrid vehicles has come from the public 
and commercial sectors.  According to media reports, the City of 
Shenzhen and China Construction Bank have purchased the majority of 
BYD's F3DM models that have been sold. 
 
¶13. (SBU) Comment: China may become a world leader in 
hybrid/electric car manufacturing; however, it is important to note 
that over 80% of China's electricity is produced by coal-fired power 
plants.  The emissions cut by increasing the domestic fleet of 
hybrid and electric vehicles could be largely negated if increases 
in vehicle-related electricity consumption are not met with a 
decrease in China's reliance on fossil fuel power plants over the 
long-term.  End Comment. 
 
GOLDBERG