Author: Kaivan Karimi
Date: July 03, 2019
According to the World Economic Forum, the global population will reach 9.8 billion by 2050. Two-thirds of that population, or, over 6 billion people, are expected to live in cities. As a result, the consumption of resources such as food, water, and energy in urban areas will increase to 1.6 to 1.8 times that of today. At current rates of pollution, greenhouse gas emissions may increase by 1.5 times. There are many implications of these and other global trends, one of which is that we must rethink how we consume, conserve, and produce energy.
Future of Mobility and Energy
The transportation industry accounts for ~45% of global fuel consumption and is one of the primary contributors of carbon dioxide into the atmosphere. It is no wonder that three out of the four macro trends driving the automotive industry are partially or fully related to addressing this problem. These trends are autonomy, connectivity (digitization), electrification, and mobility-on-demand (rideshare). The future of mobility is converging with the future of energy, and will be autonomous, shared and electric. While the debate on climate change rages on in the US, the rest of the world for the most part is taking action to address the issue head on.
Fortunately, the shift from coal to renewable energy for homes and factories is now on a great trajectory. According to the Energy Information Administration, in April 2019, renewables surpassed coal generation for the first time in the US by 16% and was on track to generate 1.4% more in May. To address automotive pollution, several countries around the world have put in place policies and regulations to reduce carbon dioxide. These policies have typically included both carrots and sticks aimed at increasing the penetration of hybrid and electric powertrain vehicles in the market. More than nine countries and a dozen cities or states have announced policies that, in effect, signal the beginning of the end for internal combustion engines. It could, perhaps, take another 30-40 years for a full transition to electric vehicles (EVs) but chances are that the tide has decisively turned. When contemplating the future of automotive industry, we use the words “autonomous” and “electric” in the same breath, and indeed the mass rollout of fully autonomous Level 5 vehicles and EVs could arrive on similar timelines. It is estimated that by 2025, the average cost of an electric vehicle will drop below that of gasoline or diesel cars. Combined with the fact that EVs are already much cheaper to operate, for the most part, that price inflection will likely accelerate EV adoption further.
China’s EV Leadership
While European countries have legislated the most aggressive policies against gasoline and diesel engines, China has established an early lead in the production of Electric Vehicles. The more than two million Plug-in Electric Vehicles (PEVs) that were sold globally in 2018, while only accounting for ~2% of global vehicle volume, represented a 63% increase from 2017. Two of the top four EV manufacturers were Chinese, with BYD leading the pack with 247,000 units (with 227,000 passenger vehicles, 6,000 light commercial vehicles, and 14,000 trucks and buses). Tesla ended up in second place with 245,000 units while BAIC (165,000) and BMW (129,000) came in third and fourth respectively.
With over 23 million cars sold in 2018, China is, by far, the largest and fastest growing automotive market by shipment volume. At the same time, hundreds of millions of Chinese families do not own a car yet, and many of them have incentives to buy EVs. With over 200 different Chinese plug-ins on sale, and local governments imposing PEV quotas on manufacturers, China is likely to stay the largest automotive market as well as the largest EV market for years to come. By 2020, China is expected to account for a 59% of global EV sales. Mini-EVs, with smaller battery packs made for short-range (100-150km) driving, are very popular due to very affordable prices (starting at around RMB 40,000 or $6,250 USD).
One of the benefits of electric vehicles over traditional combustion engines is their relative reliability. Typically, an internal combustion engine’s drivetrain would include over 2,000 moving parts. By comparison, an EV’s drive train typically has fewer than 20 moving parts. The lower mechanical complexity, in turn, lowers the likelihood of mechanical failures over the useful life of the car.
One of the largest cost drivers of EVs are the batteries. China today makes more than half of the world’s electric vehicle batteries. Most forecasts predict China producing as much as 70% of the world’s electric vehicle batteries by 2021, even as the demand for EV batteries grows. Battery prices continue to fall, and industry analysts suggest that within five years it will be cheaper to build an electric car than a traditional gas or diesel powered one.
It is pertinent to note that Chinese companies are making profits on the back of their booming EV strategy. While Tesla reported disappointing earnings last quarter, the Chinese electric car maker BYD - a BlackBerry customer - reported a staggering 632 percent increase in their Q1 net profit. According to Reuters, BYD profits jumped from 102.4 million yuan (~$16.2 million) to 749.73 million yuan (~$111.4 million). Undeniably, Chinese government subsidies contributed to that profitability. However, most of those subsidies will phase out by 2020 and BYD has been “in the green” even without them. In sharp contrast, Tesla lost over $700 million this past quarter falling 13,000 vehicles short of their 63,000-unit target. In fact, Tesla has never ever made any money since its inception in 2003.
EV subsidies are not the only way China has been going green and boosting the EV market. It is also China’s focus on converting their public transportation to EVs. China currently manufactures 99% of the world’s electric buses. The total cost of ownership of an electric bus (upfront price along with its lifetime fuel and maintenance costs) is already lower than that of gasoline-powered buses and is decreasing over time. EVs require less energy than a combustion engine vehicle, and electricity is always cheaper than gasoline for a unit of energy. Therefore, the more an EV runs the cheaper it becomes making it a “no brainer” for vehicle fleets such as bus and taxi. At the same time, air quality in Chinese mega-cities improves due to lower carbon dioxide emissions and the need for oil imports is reduced. If one includes the concept of Mobility-As-A-Service (MaaS) to public and private fleets, followed by later transition to Autonomous Vehicles (AVs), the cost could drop down to around $0.40 per mile by 2030. According to the World Economic Forum, this new mobility cost will be a game changer and will force current drivers to question self-ownership models.
Chinese Top-Down Approach to Push an Agenda
What’s behind most of the investment is China’s “Made in China 2025” industrial strategy, unveiled in 2015, with the stated objective of making China a major competitor in several core technology areas. China typically takes a top-down approach to push an agenda forward and EVs were no exception: they established a national mandate, subsidized manufacturers’ participation in the mandate, and nurtured policy competition among its city governments. Investment in EVs has created a path to global EV market domination, and EV manufacturing plant data shows that China is already pulling in a clear majority of investment. Last December, the National Development and Reform Commission, China’s top economic planner, announced that starting this year the country won’t allow new companies that only make fossil fuel-based automobiles. That move puts the brakes on investment in new fossil-fuel based automotive factories.
China has also pumped billions of dollars into state-of-the-art EV startups, some of whom have been operating in the US. At BlackBerry, we have been working with multiple Chinese-funded EV startup companies in the Bay Area, the East Coast, and the Detroit area, and have witnessed first-hand the level of innovation they are introducing to the automotive industry. We are working with most of them, providing expertise on critical success factors in the automotive industry such as how to establish a “culture of safety” and how to achieve ISO 26262 safety certifications for various software functions, among other areas. In addition to trusted and safety-certified products, we also offer a wide range of professional services that augment our customers’ development teams. It would not be unfounded to say that we at BlackBerry QNX have essentially “democratized” safety-certification by making it readily available to smaller startups, thereby lowering the barriers to entry in this respect for new entrants to the automotive market.
Overcoming Poor Range and Lack of Charging Infrastructure
Poor range has long been a limitation on EV adoption. However, with many new EV’s topping 200-mile ranges and hybrid models with much more extended range, this will pose less of a hurdle. Lack of charging infrastructure - which goes hand in hand with the range constraint - could become an obstacle to EV adoption. This is another area where China is ahead of the curve. State-owned companies such as China State Grid are investing heavily, so that by 2020, the State Council’s target of 4 million new charging posts and 12,000 charging stations will be achieved. In Europe, utilities and oil majors are the main drivers, and in the U.S., California is leading with plans to invest $1 billion in its charging network. Both, however, are running far behind China.
When the battery of an electric vehicle (EV) is exhausted, it needs to be recharged. Typically, the charging stations will be used simultaneously by many EVs and could cause a heavy load on the current electrical distribution network. So far, charging the EV batteries at home overnight has been an effective option, since the car is not being used for a long period of time, along with the fact that during the overnight hours the power load on the grid is very low. However, the proliferation of EVs requires “in-field” charging with low charging times, significantly increasing power requirements. The incorporation of charging infrastructure would be one the largest grid adaptations in support of EV proliferation. There are two standards that have been ratified in support of EV charging stations; SAE J1772 (US) and IEC 61851 (Europe and China). These standards define the voltage and current specifications, as well as the handshake protocol that an EV and the charging station must follow. The IEC61851 standard was essentially derived from SAE J1772 and has similar requirements, while adapted to European and Asian voltages. While there are three different types of charging stations, a fast charging station (type 3) that can charge an EV in less than 7 minutes will likely become the most prevalent public charging station. Once again, China leads the investment in this area.
The Race for Autonomous Vehicle (AV) Leadership
Today, the global automotive value chain is undergoing fundamental changes with traditional automakers being forced to share a piece of the pie with tech giants such as Waymo and Baidu, as well as ride-sharing companies such as Didi, Lyft, and Uber. This is fueling the race for the reinvention of “automotive” companies into “automobility” companies and, as part of that construct, the push for autonomous cars. Autonomous cars will move a large share of the mobility market value away from products (cars) to services (pay per mile). In addition, “mobility-as-a-service” (MaaS) will drastically change the vehicle ownership business model, sales volumes, and what is needed to win in the new value chain.
In the race for Autonomous Vehicle (AV) leadership, at the moment US is leading the way. According to California motor transport officials, Waymo and General Motors' Cruise are far ahead of US and international rivals in terms of miles travelled without human intervention. While China is playing catch up for now, there are many trial operations of autonomous buses and cars being conducted in Shanghai and Beijing as the development of “smart cars” has become a national priority. For example, BlackBerry’s partner Baidu has started mass production of self-driving buses in partnership with King Long Automotive. In addition, mass production of its self-driving passenger cars is expected to begin by 2020.
Baidu’s Upgraded Apollo Architecture
Where China has been more aggressive than the US and Europe is in setting technology standards and industry guidelines for AVs. With the Chinese government driving the agenda, Chinese AV companies have been actively raising funds and conducting road tests to accelerate their efforts to catch up to US companies.
In July 2017, China’s State Council issued the “New Generation Artificial Intelligence Development Plan” with an ambitious roadmap for China to lead artificial intelligence (AI), while designating AVs as a “strategic frontier.” Following up, the Ministry of Industry and Information Technology announced a Three-Year Plan for Promoting Development of a New Generation Artificial Intelligence Industry, with focus on the development of key technologies such as automotive integrated circuits, automotive AI algorithms, and advanced driver assistance systems. Finally, after announcing AVs as a technology development priority, China started developing a regulatory framework to support the growth of the industry.
Today, many Chinese competitors are vying to become China’s AV leader by investing in automated driving and AI technology development. The Chinese internet giant and our partner, Baidu, is leading the way with its Apollo project. The newcomer Pony.ai is another well-founded company involved in road-tests and trials in China and California. Several European and US based companies have already announced their participation in the AV trials in China.
Since many different pieces of the puzzle must come together for fully autonomous cars (SAE Level 4 and above) to roll out in volume, one would assume that it will take the Western world another 10-15 years to realize that outcome. On the other hand, the top-down approach in China seems to be targeting mass deployment in nine or ten years.
With EVs and AVs on converging paths to productization, does that mean China will take the lead on AVs as well?