China now has more billionaires than the United States. Patrick Chou particularly benefits from this. He sells luxury and sports cars. In an interview with Frank Sieren, the entrepreneur, who grew up in Germany, tells us why sales rose during the COVID pandemic and why young people are also among his customers. Chou is convinced that German manufacturers will dominate the luxury car market for a long time to come. But they would have to be mindful and not sleep through new trends.
EVs are already a familiar trend. They are considered the hope for reducing emissions in traffic. China is the largest market for cars with alternative drives. But one problem remains: The high dependence on coal-fired electricity. The dirty power source reduces the climate benefits of EVs, according to a new collection of data from a Bloomberg think tank. We have compiled the most important key figures on the market development of EVs and batteries in the relevant markets.
Economically, China came out of the pandemic quite well. But in the meantime, growth is slowing down. The International Monetary Fund has recommended some reforms to China. The state should strengthen investments in the social system and in sustainable sectors, according to IMF experts. In today’s Opinion, Shang-Jin Wei takes up the growth debate. The professor of finance and economics at Columbia Business School criticizes Beijing’s reforms of the real estate and tech sectors for coming too abruptly and costing growth. He says that while Beijing needs to be forceful in achieving its climate goals, it should send the right signals early on so that companies can adapt to the new realities in time.
Have a great start to the week!
Disclaimer: This interview has been translated into English and is not considered an official translation by any party involved in the interview.
Patrick Chou is one of the most successful self-made entrepreneurs from Germany in China. In 1996, he returned to China from Germany as the son of a Chinese family. There, the now 52-year-old built up a distribution network for luxury cars. Today, Chou is one of the largest Porsche dealers in the world. His company Better Life Group has branches in many regions of China. Last year, the company achieved a turnover of around €1.2 billion. A few months ago, Chou successfully listed Better Life on the Hong Kong stock exchange. You can watch the interview in full length here.
Mr. Chou, how long will German manufacturers of luxury cars continue to lead in China?
I think for a very, very long time. Because for decades, German and British car manufacturers, in particular, have been almost the only ones in the premium segment.
But aren’t Chinese manufacturers following suit? Some new EVs already promise a lot, don’t they?
But most of them are still far away from the ultra-luxury cars in terms of price. And for those that have similar prices, the quality is not yet right. European standards are simply different. Europeans have a different value system in this respect.
And the Chinese see the difference?
Yes. And during the COVID pandemic, interest increased once again. On the one hand, in German luxury cars, but especially in ultra-luxury vehicles, such as the MB G-Class, Maybach, Bentley, Porsche, or Rolls-Royce. In other words, vehicles that cost over €200,000. The waiting time for such cars in China is currently 6 to 18 months. If you have special requests for the equipment, it takes even longer. The car dealers in this segment have only one problem: Where do they get enough cars from quickly? We are living in golden days.
Why during COVID of all times?
It’s a combination of reasons. You can’t travel because of the pandemic. You have one or two apartments. Too much food and drink is unhealthy. But above all, COVID has made people more thoughtful. They feel more like they need to live and enjoy now. And the need for protection is greater. That makes it obvious to buy a nice, new car. One that no one else has.
But do young people think this way too?
Young people in particular. The average age of our customers is between 30 and 35.
Amazing: The average German Porsche driver is around 60. Why is that?
There are comparatively many people living in China who are very successful at a very young age. And then there are already heirs of the up-and-coming generation. Both groups not only have purchasing power but are also very keen consumers. They are also not brand loyal; they just try out the brands. So we have to keep offering them new cars and brands.
So it’s primarily men?
Not at all. Surprisingly, for example, almost half of Chinese Porsche buyers are women. We have a plant in Chengdu, where as many as 67 percent of buyers are women. In Germany, on the other hand, over 70 percent are men.
But they also want to show that they have made it. That they are winners of the Chinese boom?
Sure. You want to earn even more, work more, and have less free time. In what little free time you have, you want to have some of your money and success accessible quickly. And that’s why it makes sense to buy French luxury fashion or luxury cars that you can enjoy as soon as you leave the office. A pleasure, by the way, that can be seen by all. Success is shown in China, not hidden.
But will that still be the case for the next generation?
In Generation Z, born after 1995, men and women will have an even more significant impact on our business. Because they are considered even more open and international than the generation before. They are even more interested in exclusive toys. I expect a further increase in sales from this generation.
But isn’t that the generation more likely to buy a connected EV?
Connected definitely, an EV in the luxury segment, not necessarily, and only if the luxury factor is right. That’s why it’s important that German manufacturers catch up very quickly when it comes to connectivity. The Chinese are already leading the way on these issues and are very spoiled.
And will the Germans be able to do that?
Hopefully. What the S-Class, for example, offers in this area is already very impressive.
So you’re not afraid of the new Chinese EVs?
These are operating systems on wheels, computers on the move. That’s a completely different business. It’s already playing a big role in the lower and mid-price segments. But not with us yet. Nevertheless, I am watching this very closely.
Are there any Chinese manufacturers already playing in the ultra-luxury segment?
No. Basically none yet. But the speed of development is incredibly fast. You have to be very alert. That’s what we keep telling German luxury manufacturers: Don’t feel too safe. Accept the challenge. Even if it still seems a long way off. Anyone who doesn’t think in terms of connectivity supported by artificial intelligence today will quickly fall behind. But ultra-luxury manufacturers are learning connectivity faster than Chinese manufacturers are learning how to do ultra-luxury. This requires decades of experience.
Which is actually your favorite car?
I’m not telling. (laughs)
How differently are customers served at your dealerships?
The biggest difference is that we know much more about the customers than in Germany. We can collect much more data, and the willingness to give us this data is also much greater. And the group we serve is much larger. Since most customers have several cars, but only two vehicles are allowed per family, and there are a limited number of license plates, the larger circle of relatives is included to build up their car pool. By the way, a license plate alone in Shanghai currently costs around €12,000 to €13,000.
Doesn’t that put the brakes on buying?
If you buy a car for €200,000 or €300,000, the cost of a license plate is not as high. And living in Beijing and Shanghai, in general, is already more expensive than in Berlin or Munich. That must not be forgotten. This comparison clearly shows that the desire to buy has not been curbed: In Beijing alone, more luxury cars are sold per year than in Japan as a whole.
Do their car dealerships look different than the ones in Germany?
Customers come to us because they feel comfortable and consider it an experience. At the weekend, it’s like a well-stocked luxury department store. And we also offer customers a good lunch when they come to us.
However, when you came to China in 1996, the market was still very small.
Yeah. About 500,000 vehicles. Today it’s about 20 million. I started with a garage. The first real car dealerships didn’t exist until around 2000. We had our first Audi contract in 1999. Porsche joined in 2001. At that time, approximately 10 Porsches a year were sold in China. Today it’s around 100,000, and Audi was already selling 17,000 a year. Today it’s 60,000 to 70,000 vehicles a month. So all this has come about in just 20 years. Today, we have a turnover of over €1 billion and are not in debt.
The car market is highly regulated. Is that fun as an entrepreneur?
You have to be able to react very quickly, be extremely flexible. For every regulation, every market upheaval, you have to have an answer immediately; you don’t have time. The rules of the game are sometimes changed overnight without warning.
A few months ago, you turned over a new leaf. You listed your company on the Hong Kong Stock Exchange. Why?
We can invest the money we raised through the IPO to grow. And the IPO rules force our team to be more transparent and efficient. In the long run, that makes a company more valuable. In the short term, though, it’s very nerve-wracking when you suddenly have to comply with all the rules and laws. Now you don’t tell yourself if the numbers are right; lawyers and auditors tell you. That’s when you really have to pull yourself together, so you don’t forget about making money. With 1.2 billion in sales, we are still small and have to grow by buying competitors.
You collect ancient Chinese art, but also modern art. Why?
Because I hate being bored. But I don’t always like selling cars. Chinese art is very interesting. And I have to spend money, after all, and just making money doesn’t make sense.
Your specialty?
I collect stone Buddhas.
Can you imagine collecting only art?
No. My son is already collecting. It’s already a nice mini-dynasty: The first generation ran restaurants, the second sold cars, the third possibly trades in art.
Just in time for the UN Climate Change Conference, data analysts at Bloomberg New Energy Finance (BNEF) have published a new zero-emission vehicles factbook. They show that the market for electric cars continues to boom. In the first half of 2021, 7.2 percent of cars sold worldwide were EVs. Just two years ago, that figure was only 2.6 percent. By 2040, experts predict that 70 percent of all car sales will be zero-emission vehicles – more optimistic than previous forecasts. But despite the rapid growth and good predictions, the transport sector is still a long way from a zero-emissions path and achieving climate targets, according to BNEF. No more cars with internal combustion engines should be sold worldwide as early as 2035 if the transport sector is to achieve the goal of net-zero emissions by 2050. This is because cars sold in 2035 will, in all likelihood, still be on the roads in 2050, causing emissions in the process.
China was once again the largest market for EVs in the first half of 2021. In 2020, Europe had overtaken the People’s Republic in terms of sales for the first time. However, the recent steep Chinese growth curve is already flattening out slightly. In contrast, sales of EVs in the major European car markets – Germany, France, and Italy – have risen rapidly in recent years.
However, Europe and China differ in the powertrain of the cars sold. In the People’s Republic, most EVs are purely battery-powered vehicles. China continues to lead the world in these, as sales in Europe are almost evenly split between battery-powered and plug-in cars with electric and internal combustion engines. According to BNEF, there are now 4.3 million pure electric cars registered in the People’s Republic. In Europe, the figure is 2.2 million.
However, there is regular criticism of plug-in hybrids that drivers use the car too often as a combustion engine. Especially as company cars, plug-in hybrids perform poorly. According to studies by the Fraunhofer Institute, they have an electric driving share of only 18 percent. However, plug-in cars only have a climate advantage over internal combustion engines if they are used electrically for 50 percent or more.
But as positive as the figures for China sound: The dependency on coal-fired electricity is undoing much of the theoretical climate progress there. A purely battery-powered EV in China causes an average of 36 tons of CO2 when the production and entire service life are considered. Most of the emissions occur during use due to the high proportion of coal in China’s energy mix. It is true that battery-powered EVs cause 18 percent less CO2 than internal combustion vehicles over a useful life of 250,000 kilometers in China. In Germany (49 percent less), Great Britain (76 percent less), and the USA (60 percent less), however, this lead of electric cars is much greater in the CO2 comparison with combustion engines.
The BNEF data also suggest that many EVs in Europe and the US will be competitive with internal combustion cars as early as 2023 and 2024. Then they would no longer need to receive subsidies. For the Chinese market, the forecasts are somewhat more pessimistic. Only mid-sized EVs could already reach a similar price level as internal combustion engines in 2023 without subsidies. For small and large EVs, competitiveness is forecast for 2026, for e-SUVs not until 2028.
Nevertheless, China is already phasing out direct subsidies for EVs at the end of 2022. In order to force combustion engines out of the market, the Chinese authorities are now relying more heavily on specifications for fleet limits and a credit system with emission points. By 2025, the fleet limit will be reduced to four liters of fuel consumption per vehicle. Experts at BNEF estimate that EVs will have to account for 17 percent of all sales in China in 2023 already because of this.
However, the People’s Republic has not yet decided on an end date for the sale of internal combustion vehicles. Only the southern Chinese island province of Hainan wants to stop allowing new combustion vehicles from 2030. However, rich boom cities could also decide to ban internal combustion vehicles, says Ilaria Mazzocco, a China energy expert from the Center for Strategic & International Studies (China.Table reported).
China’s dominance of e-buses is striking. Around 97 percent of the world’s e-buses are on Chinese roads. Other countries have been slow to catch up in this area. While there are almost 620,000 e-buses in China, there are only 8,700 in Europe. China’s dominance is mainly due to national subsidies and the policy of local authorities to convert their bus fleets to zero emissions. However, subsidies for e-buses in China will also expire in 2022.
The situation is quite different in the EU. The EU’s Clean Vehicles Directive recently set binding targets for the procurement of low-emission and CO2-free buses. By 2030, 65 percent of all newly procured buses are to use alternative fuels and half of the buses procured must be emission-free. This is one of the reasons why Chinese manufacturer BYD is planning to expand production at its plant in Hungary. The company plans to produce 1,000 buses a year there by 2022. That’s an increase of five times current production. By comparison, the European market leader for e-buses, Solaris, delivered 457 e-buses last year.
Europe’s dependence on China for batteries for EVs will decrease somewhat in the coming years. While only six percent of batteries are manufactured in Europe today, BNEF predicts that this figure will rise to 18 percent by 2025. However, China will remain the dominant manufacturer. In 2025, almost four times more batteries for EVs will be produced in the People’s Republic than in Europe.
In early 2021, the consensus forecast for Chinese GDP growth this year among 25 major global banks and other professional forecasters was 8.3 percent. In contrast, the Chinese government’s own growth target was around 6 percent, lower than the best guesses of 24 out of the 25 institutional forecasters. Did the government know something that outsiders had missed? Did it plan to do something that it regards as desirable even though it might compromise growth?
More recently, international banks have revised down their full-year growth projections for China as the economy’s expansion has slowed. Third-quarter growth was only 4.9 percent year on year, down from 18.3 percent and 7.9 percent in the first two quarters, respectively. The high first-quarter year-on-year growth came in large part because of the negative growth in the first quarter of 2020 due to pandemic-induced lockdowns. The low third-quarter growth is raising concerns about the growth prospects in the fourth quarter and next year.
Some of the reduction in growth stems from China’s zero-tolerance policy toward COVID-19, which calls for more frequent lockdowns than in most other countries. A spate of local COVID outbreaks in the summer has triggered lockdowns or travel restrictions in multiple Chinese cities. These have not only reduced manufacturing output but also severely affected many service-sector jobs just as tourism was beginning to boom.
But the pandemic is not the only factor behind the slowdown. The government’s green industrial policy, tighter regulation of the property sector, and blacklists of online platforms also have collectively curtailed growth.
Following its pledge to halt the rise in China’s carbon-dioxide emissions before 2030 and achieve net zero by 2060, the government has forcefully and often abruptly reduced electricity generation in coal-fired power plants, sometimes by 20 percent. The resulting power outages disrupted production at affected factories.
In addition, the “three red lines” policy, initiated in August 2020 and intensified this year, sets ceilings on property developers’ debt-to-asset ratio, debt-to-equity ratio, and debt-to-cash ratio. Because many of these firms could not meet one or more of the red lines, and banks and capital markets are reluctant to provide new financing, they must sell assets, scale down operations, or both.
Evergrande may be the most prominent Chinese property developer to have run into financial trouble, but it is not the only one. Moreover, a real-estate downturn can easily spill over to industries such as steel, cement, and home furnishings and appliances.
Lastly, the authorities’ decisions to blacklist online-education companies, ratchet up antitrust enforcement, and enact a broadly worded data-protection law have helped to halve the stock prices of many listed digital-economy companies over the last 12 months. And falling equity valuations are merely the tip of the iceberg, as many digital firms and their suppliers have had to scale back their ambitions and plans. Hundreds of online-education providers have folded and laid off their employees.
The goals of the policies are sensible, but the manner of implementing them is exacerbating their economic costs. A zero-COVID strategy was arguably reasonable in the pre-vaccine stage of the pandemic, and helped China to achieve a positive economic growth rate last year. But as new variants continue to emerge, all countries will eventually have to learn to live with the coronavirus. Luckily, the cost of doing so is becoming more manageable as rates of vaccination and natural immunity rise.
If China is to use its strong implementation capacity, then pushing for universal COVID-19 vaccination would seem well justified (as individuals who decline the jab may end up harming others). On the other hand, periodic lockdowns and border closures are highly disruptive to the economy and people’s lives, and not a sustainable strategy in the pandemic’s post-vaccine phase.
Regarding green industrial policy, power generation is the most carbon-intensive sector in China, accounting for about 40 percent of the country’s energy-consumption-based emissions. So, reducing reliance on coal-fired electricity makes a valuable contribution to national and global emissions-reduction efforts. But there are different ways to manage the change.
China’s own experience with economic reforms suggests that using price signals and market forces tends to minimize the costs of structural change. In particular, raising China’s carbon price to a sufficiently high level and announcing a predictable price path with a sufficient lead time could enable electricity producers and users to adjust and adapt better, thus helping them to achieve the same amount of emissions reductions with much less foregone GDP growth. Such an approach would also be less disruptive for Chinese households, including many in the northeastern part of the country who may be worried about heating and power supply as a cold winter arrives.
Likewise, while moderating speculative price increases in real estate is a desirable goal, constraining property development does not necessarily help to achieve it. Given that roughly 30 percent of the Chinese economy rises or falls with the real estate and construction sectors, an alternative path could cushion the adjustment pains. For example, promoting more affordable housing for low-income families and migrants from rural areas could create offsetting demand for furniture, appliances, steel, and cement.
Restricting after-school learning programs can free up time for children to engage in activities that nurture creativity and athletic ability, and alleviate the financial burden for families that previously felt pressured to purchase online-education content for their children. So, there is a laudable social rationale for the new regulation. Its relatively sudden implementation, however, not only reduces online-education firms’ profits, stock prices, and employment, but also highlights the risk of abrupt policy changes in other sectors, affecting broader investor sentiment.
China can restore investor confidence and return to its potential growth rate. To do that, the country will benefit from reforms affecting how new regulations and pandemic-control measures are debated, vetted, and implemented.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
Looking for a property with a view? In Wuyishan National Park in the southeastern province of Fujian, visitors can sometimes view the clouds from above.
China now has more billionaires than the United States. Patrick Chou particularly benefits from this. He sells luxury and sports cars. In an interview with Frank Sieren, the entrepreneur, who grew up in Germany, tells us why sales rose during the COVID pandemic and why young people are also among his customers. Chou is convinced that German manufacturers will dominate the luxury car market for a long time to come. But they would have to be mindful and not sleep through new trends.
EVs are already a familiar trend. They are considered the hope for reducing emissions in traffic. China is the largest market for cars with alternative drives. But one problem remains: The high dependence on coal-fired electricity. The dirty power source reduces the climate benefits of EVs, according to a new collection of data from a Bloomberg think tank. We have compiled the most important key figures on the market development of EVs and batteries in the relevant markets.
Economically, China came out of the pandemic quite well. But in the meantime, growth is slowing down. The International Monetary Fund has recommended some reforms to China. The state should strengthen investments in the social system and in sustainable sectors, according to IMF experts. In today’s Opinion, Shang-Jin Wei takes up the growth debate. The professor of finance and economics at Columbia Business School criticizes Beijing’s reforms of the real estate and tech sectors for coming too abruptly and costing growth. He says that while Beijing needs to be forceful in achieving its climate goals, it should send the right signals early on so that companies can adapt to the new realities in time.
Have a great start to the week!
Disclaimer: This interview has been translated into English and is not considered an official translation by any party involved in the interview.
Patrick Chou is one of the most successful self-made entrepreneurs from Germany in China. In 1996, he returned to China from Germany as the son of a Chinese family. There, the now 52-year-old built up a distribution network for luxury cars. Today, Chou is one of the largest Porsche dealers in the world. His company Better Life Group has branches in many regions of China. Last year, the company achieved a turnover of around €1.2 billion. A few months ago, Chou successfully listed Better Life on the Hong Kong stock exchange. You can watch the interview in full length here.
Mr. Chou, how long will German manufacturers of luxury cars continue to lead in China?
I think for a very, very long time. Because for decades, German and British car manufacturers, in particular, have been almost the only ones in the premium segment.
But aren’t Chinese manufacturers following suit? Some new EVs already promise a lot, don’t they?
But most of them are still far away from the ultra-luxury cars in terms of price. And for those that have similar prices, the quality is not yet right. European standards are simply different. Europeans have a different value system in this respect.
And the Chinese see the difference?
Yes. And during the COVID pandemic, interest increased once again. On the one hand, in German luxury cars, but especially in ultra-luxury vehicles, such as the MB G-Class, Maybach, Bentley, Porsche, or Rolls-Royce. In other words, vehicles that cost over €200,000. The waiting time for such cars in China is currently 6 to 18 months. If you have special requests for the equipment, it takes even longer. The car dealers in this segment have only one problem: Where do they get enough cars from quickly? We are living in golden days.
Why during COVID of all times?
It’s a combination of reasons. You can’t travel because of the pandemic. You have one or two apartments. Too much food and drink is unhealthy. But above all, COVID has made people more thoughtful. They feel more like they need to live and enjoy now. And the need for protection is greater. That makes it obvious to buy a nice, new car. One that no one else has.
But do young people think this way too?
Young people in particular. The average age of our customers is between 30 and 35.
Amazing: The average German Porsche driver is around 60. Why is that?
There are comparatively many people living in China who are very successful at a very young age. And then there are already heirs of the up-and-coming generation. Both groups not only have purchasing power but are also very keen consumers. They are also not brand loyal; they just try out the brands. So we have to keep offering them new cars and brands.
So it’s primarily men?
Not at all. Surprisingly, for example, almost half of Chinese Porsche buyers are women. We have a plant in Chengdu, where as many as 67 percent of buyers are women. In Germany, on the other hand, over 70 percent are men.
But they also want to show that they have made it. That they are winners of the Chinese boom?
Sure. You want to earn even more, work more, and have less free time. In what little free time you have, you want to have some of your money and success accessible quickly. And that’s why it makes sense to buy French luxury fashion or luxury cars that you can enjoy as soon as you leave the office. A pleasure, by the way, that can be seen by all. Success is shown in China, not hidden.
But will that still be the case for the next generation?
In Generation Z, born after 1995, men and women will have an even more significant impact on our business. Because they are considered even more open and international than the generation before. They are even more interested in exclusive toys. I expect a further increase in sales from this generation.
But isn’t that the generation more likely to buy a connected EV?
Connected definitely, an EV in the luxury segment, not necessarily, and only if the luxury factor is right. That’s why it’s important that German manufacturers catch up very quickly when it comes to connectivity. The Chinese are already leading the way on these issues and are very spoiled.
And will the Germans be able to do that?
Hopefully. What the S-Class, for example, offers in this area is already very impressive.
So you’re not afraid of the new Chinese EVs?
These are operating systems on wheels, computers on the move. That’s a completely different business. It’s already playing a big role in the lower and mid-price segments. But not with us yet. Nevertheless, I am watching this very closely.
Are there any Chinese manufacturers already playing in the ultra-luxury segment?
No. Basically none yet. But the speed of development is incredibly fast. You have to be very alert. That’s what we keep telling German luxury manufacturers: Don’t feel too safe. Accept the challenge. Even if it still seems a long way off. Anyone who doesn’t think in terms of connectivity supported by artificial intelligence today will quickly fall behind. But ultra-luxury manufacturers are learning connectivity faster than Chinese manufacturers are learning how to do ultra-luxury. This requires decades of experience.
Which is actually your favorite car?
I’m not telling. (laughs)
How differently are customers served at your dealerships?
The biggest difference is that we know much more about the customers than in Germany. We can collect much more data, and the willingness to give us this data is also much greater. And the group we serve is much larger. Since most customers have several cars, but only two vehicles are allowed per family, and there are a limited number of license plates, the larger circle of relatives is included to build up their car pool. By the way, a license plate alone in Shanghai currently costs around €12,000 to €13,000.
Doesn’t that put the brakes on buying?
If you buy a car for €200,000 or €300,000, the cost of a license plate is not as high. And living in Beijing and Shanghai, in general, is already more expensive than in Berlin or Munich. That must not be forgotten. This comparison clearly shows that the desire to buy has not been curbed: In Beijing alone, more luxury cars are sold per year than in Japan as a whole.
Do their car dealerships look different than the ones in Germany?
Customers come to us because they feel comfortable and consider it an experience. At the weekend, it’s like a well-stocked luxury department store. And we also offer customers a good lunch when they come to us.
However, when you came to China in 1996, the market was still very small.
Yeah. About 500,000 vehicles. Today it’s about 20 million. I started with a garage. The first real car dealerships didn’t exist until around 2000. We had our first Audi contract in 1999. Porsche joined in 2001. At that time, approximately 10 Porsches a year were sold in China. Today it’s around 100,000, and Audi was already selling 17,000 a year. Today it’s 60,000 to 70,000 vehicles a month. So all this has come about in just 20 years. Today, we have a turnover of over €1 billion and are not in debt.
The car market is highly regulated. Is that fun as an entrepreneur?
You have to be able to react very quickly, be extremely flexible. For every regulation, every market upheaval, you have to have an answer immediately; you don’t have time. The rules of the game are sometimes changed overnight without warning.
A few months ago, you turned over a new leaf. You listed your company on the Hong Kong Stock Exchange. Why?
We can invest the money we raised through the IPO to grow. And the IPO rules force our team to be more transparent and efficient. In the long run, that makes a company more valuable. In the short term, though, it’s very nerve-wracking when you suddenly have to comply with all the rules and laws. Now you don’t tell yourself if the numbers are right; lawyers and auditors tell you. That’s when you really have to pull yourself together, so you don’t forget about making money. With 1.2 billion in sales, we are still small and have to grow by buying competitors.
You collect ancient Chinese art, but also modern art. Why?
Because I hate being bored. But I don’t always like selling cars. Chinese art is very interesting. And I have to spend money, after all, and just making money doesn’t make sense.
Your specialty?
I collect stone Buddhas.
Can you imagine collecting only art?
No. My son is already collecting. It’s already a nice mini-dynasty: The first generation ran restaurants, the second sold cars, the third possibly trades in art.
Just in time for the UN Climate Change Conference, data analysts at Bloomberg New Energy Finance (BNEF) have published a new zero-emission vehicles factbook. They show that the market for electric cars continues to boom. In the first half of 2021, 7.2 percent of cars sold worldwide were EVs. Just two years ago, that figure was only 2.6 percent. By 2040, experts predict that 70 percent of all car sales will be zero-emission vehicles – more optimistic than previous forecasts. But despite the rapid growth and good predictions, the transport sector is still a long way from a zero-emissions path and achieving climate targets, according to BNEF. No more cars with internal combustion engines should be sold worldwide as early as 2035 if the transport sector is to achieve the goal of net-zero emissions by 2050. This is because cars sold in 2035 will, in all likelihood, still be on the roads in 2050, causing emissions in the process.
China was once again the largest market for EVs in the first half of 2021. In 2020, Europe had overtaken the People’s Republic in terms of sales for the first time. However, the recent steep Chinese growth curve is already flattening out slightly. In contrast, sales of EVs in the major European car markets – Germany, France, and Italy – have risen rapidly in recent years.
However, Europe and China differ in the powertrain of the cars sold. In the People’s Republic, most EVs are purely battery-powered vehicles. China continues to lead the world in these, as sales in Europe are almost evenly split between battery-powered and plug-in cars with electric and internal combustion engines. According to BNEF, there are now 4.3 million pure electric cars registered in the People’s Republic. In Europe, the figure is 2.2 million.
However, there is regular criticism of plug-in hybrids that drivers use the car too often as a combustion engine. Especially as company cars, plug-in hybrids perform poorly. According to studies by the Fraunhofer Institute, they have an electric driving share of only 18 percent. However, plug-in cars only have a climate advantage over internal combustion engines if they are used electrically for 50 percent or more.
But as positive as the figures for China sound: The dependency on coal-fired electricity is undoing much of the theoretical climate progress there. A purely battery-powered EV in China causes an average of 36 tons of CO2 when the production and entire service life are considered. Most of the emissions occur during use due to the high proportion of coal in China’s energy mix. It is true that battery-powered EVs cause 18 percent less CO2 than internal combustion vehicles over a useful life of 250,000 kilometers in China. In Germany (49 percent less), Great Britain (76 percent less), and the USA (60 percent less), however, this lead of electric cars is much greater in the CO2 comparison with combustion engines.
The BNEF data also suggest that many EVs in Europe and the US will be competitive with internal combustion cars as early as 2023 and 2024. Then they would no longer need to receive subsidies. For the Chinese market, the forecasts are somewhat more pessimistic. Only mid-sized EVs could already reach a similar price level as internal combustion engines in 2023 without subsidies. For small and large EVs, competitiveness is forecast for 2026, for e-SUVs not until 2028.
Nevertheless, China is already phasing out direct subsidies for EVs at the end of 2022. In order to force combustion engines out of the market, the Chinese authorities are now relying more heavily on specifications for fleet limits and a credit system with emission points. By 2025, the fleet limit will be reduced to four liters of fuel consumption per vehicle. Experts at BNEF estimate that EVs will have to account for 17 percent of all sales in China in 2023 already because of this.
However, the People’s Republic has not yet decided on an end date for the sale of internal combustion vehicles. Only the southern Chinese island province of Hainan wants to stop allowing new combustion vehicles from 2030. However, rich boom cities could also decide to ban internal combustion vehicles, says Ilaria Mazzocco, a China energy expert from the Center for Strategic & International Studies (China.Table reported).
China’s dominance of e-buses is striking. Around 97 percent of the world’s e-buses are on Chinese roads. Other countries have been slow to catch up in this area. While there are almost 620,000 e-buses in China, there are only 8,700 in Europe. China’s dominance is mainly due to national subsidies and the policy of local authorities to convert their bus fleets to zero emissions. However, subsidies for e-buses in China will also expire in 2022.
The situation is quite different in the EU. The EU’s Clean Vehicles Directive recently set binding targets for the procurement of low-emission and CO2-free buses. By 2030, 65 percent of all newly procured buses are to use alternative fuels and half of the buses procured must be emission-free. This is one of the reasons why Chinese manufacturer BYD is planning to expand production at its plant in Hungary. The company plans to produce 1,000 buses a year there by 2022. That’s an increase of five times current production. By comparison, the European market leader for e-buses, Solaris, delivered 457 e-buses last year.
Europe’s dependence on China for batteries for EVs will decrease somewhat in the coming years. While only six percent of batteries are manufactured in Europe today, BNEF predicts that this figure will rise to 18 percent by 2025. However, China will remain the dominant manufacturer. In 2025, almost four times more batteries for EVs will be produced in the People’s Republic than in Europe.
In early 2021, the consensus forecast for Chinese GDP growth this year among 25 major global banks and other professional forecasters was 8.3 percent. In contrast, the Chinese government’s own growth target was around 6 percent, lower than the best guesses of 24 out of the 25 institutional forecasters. Did the government know something that outsiders had missed? Did it plan to do something that it regards as desirable even though it might compromise growth?
More recently, international banks have revised down their full-year growth projections for China as the economy’s expansion has slowed. Third-quarter growth was only 4.9 percent year on year, down from 18.3 percent and 7.9 percent in the first two quarters, respectively. The high first-quarter year-on-year growth came in large part because of the negative growth in the first quarter of 2020 due to pandemic-induced lockdowns. The low third-quarter growth is raising concerns about the growth prospects in the fourth quarter and next year.
Some of the reduction in growth stems from China’s zero-tolerance policy toward COVID-19, which calls for more frequent lockdowns than in most other countries. A spate of local COVID outbreaks in the summer has triggered lockdowns or travel restrictions in multiple Chinese cities. These have not only reduced manufacturing output but also severely affected many service-sector jobs just as tourism was beginning to boom.
But the pandemic is not the only factor behind the slowdown. The government’s green industrial policy, tighter regulation of the property sector, and blacklists of online platforms also have collectively curtailed growth.
Following its pledge to halt the rise in China’s carbon-dioxide emissions before 2030 and achieve net zero by 2060, the government has forcefully and often abruptly reduced electricity generation in coal-fired power plants, sometimes by 20 percent. The resulting power outages disrupted production at affected factories.
In addition, the “three red lines” policy, initiated in August 2020 and intensified this year, sets ceilings on property developers’ debt-to-asset ratio, debt-to-equity ratio, and debt-to-cash ratio. Because many of these firms could not meet one or more of the red lines, and banks and capital markets are reluctant to provide new financing, they must sell assets, scale down operations, or both.
Evergrande may be the most prominent Chinese property developer to have run into financial trouble, but it is not the only one. Moreover, a real-estate downturn can easily spill over to industries such as steel, cement, and home furnishings and appliances.
Lastly, the authorities’ decisions to blacklist online-education companies, ratchet up antitrust enforcement, and enact a broadly worded data-protection law have helped to halve the stock prices of many listed digital-economy companies over the last 12 months. And falling equity valuations are merely the tip of the iceberg, as many digital firms and their suppliers have had to scale back their ambitions and plans. Hundreds of online-education providers have folded and laid off their employees.
The goals of the policies are sensible, but the manner of implementing them is exacerbating their economic costs. A zero-COVID strategy was arguably reasonable in the pre-vaccine stage of the pandemic, and helped China to achieve a positive economic growth rate last year. But as new variants continue to emerge, all countries will eventually have to learn to live with the coronavirus. Luckily, the cost of doing so is becoming more manageable as rates of vaccination and natural immunity rise.
If China is to use its strong implementation capacity, then pushing for universal COVID-19 vaccination would seem well justified (as individuals who decline the jab may end up harming others). On the other hand, periodic lockdowns and border closures are highly disruptive to the economy and people’s lives, and not a sustainable strategy in the pandemic’s post-vaccine phase.
Regarding green industrial policy, power generation is the most carbon-intensive sector in China, accounting for about 40 percent of the country’s energy-consumption-based emissions. So, reducing reliance on coal-fired electricity makes a valuable contribution to national and global emissions-reduction efforts. But there are different ways to manage the change.
China’s own experience with economic reforms suggests that using price signals and market forces tends to minimize the costs of structural change. In particular, raising China’s carbon price to a sufficiently high level and announcing a predictable price path with a sufficient lead time could enable electricity producers and users to adjust and adapt better, thus helping them to achieve the same amount of emissions reductions with much less foregone GDP growth. Such an approach would also be less disruptive for Chinese households, including many in the northeastern part of the country who may be worried about heating and power supply as a cold winter arrives.
Likewise, while moderating speculative price increases in real estate is a desirable goal, constraining property development does not necessarily help to achieve it. Given that roughly 30 percent of the Chinese economy rises or falls with the real estate and construction sectors, an alternative path could cushion the adjustment pains. For example, promoting more affordable housing for low-income families and migrants from rural areas could create offsetting demand for furniture, appliances, steel, and cement.
Restricting after-school learning programs can free up time for children to engage in activities that nurture creativity and athletic ability, and alleviate the financial burden for families that previously felt pressured to purchase online-education content for their children. So, there is a laudable social rationale for the new regulation. Its relatively sudden implementation, however, not only reduces online-education firms’ profits, stock prices, and employment, but also highlights the risk of abrupt policy changes in other sectors, affecting broader investor sentiment.
China can restore investor confidence and return to its potential growth rate. To do that, the country will benefit from reforms affecting how new regulations and pandemic-control measures are debated, vetted, and implemented.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
Copyright: Project Syndicate, 2021.
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Looking for a property with a view? In Wuyishan National Park in the southeastern province of Fujian, visitors can sometimes view the clouds from above.
