9
Findings and Recommendations

This chapter summarizes the findings of this report, and, based on those findings, makes specific recommendations for actions the committee believes are needed to build a competitive automotive industry in China while minimizing its adverse impacts on China’s environment, society, and economy.

PATTERNS OF MOTORIZATION

Chapter 2 describes how China’s pattern of motorization is similar thus far to that of many other countries, and how the size of its motor vehicle fleet is strongly associated with its growing income level. Similarly, the fact that paved road length increases as national income increases parallels the experience of other countries. If China’s gross domestic product (GDP) continues to grow, these patterns indicate that the number of vehicles will continue to increase and that the automobile share of the fleet will increase greatly. However, the attributes of the vehicles will depend greatly on national and regional government policies. Among the most important are those for land use, traffic management, and transportation infrastructure, as well as for fuel prices and vehicle performance standards for emissions, safety, and energy efficiency. Countries with high fuel taxes tend to have a preponderance of smaller cars, and those with low fuel prices have larger cars. Rigorous emissions standards tend to promote higher technology and more expensive vehicles.



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Personal Cars and China 9 Findings and Recommendations This chapter summarizes the findings of this report, and, based on those findings, makes specific recommendations for actions the committee believes are needed to build a competitive automotive industry in China while minimizing its adverse impacts on China’s environment, society, and economy. PATTERNS OF MOTORIZATION Chapter 2 describes how China’s pattern of motorization is similar thus far to that of many other countries, and how the size of its motor vehicle fleet is strongly associated with its growing income level. Similarly, the fact that paved road length increases as national income increases parallels the experience of other countries. If China’s gross domestic product (GDP) continues to grow, these patterns indicate that the number of vehicles will continue to increase and that the automobile share of the fleet will increase greatly. However, the attributes of the vehicles will depend greatly on national and regional government policies. Among the most important are those for land use, traffic management, and transportation infrastructure, as well as for fuel prices and vehicle performance standards for emissions, safety, and energy efficiency. Countries with high fuel taxes tend to have a preponderance of smaller cars, and those with low fuel prices have larger cars. Rigorous emissions standards tend to promote higher technology and more expensive vehicles.

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Personal Cars and China Recommendation To pursue the goals of energy conservation and environmental quality, the Chinese government should employ vehicle performance standards on emissions, fuel economy, durability, and safety. Such a move is likely to restrict the field to those manufacturers that have the level of technology to meet the performance standards and are capable of producing vehicles of the required quality. The overall effect will likely be consolidation of the industry, as suggested in the five-year plan for the development of the automotive industry. The growing market for automobiles in China will require expansion of related services such as fuel distribution and sales, credit systems, automobile maintenance facilities, vehicle inspection, parking facilities, and liability insurance. Because most of these services are in the public sector in China, the government will have to ensure that services and facilities keep pace with market growth and do not unintentionally limit the acceptance of personal automobiles among the Chinese people. THE FUTURE OF THE CHINESE AUTOMOTIVE INDUSTRY After many years of effort, China has developed a strong domestic motor vehicle industry, but one that is heavily dependent on overseas manufacturers for technology. At present, China is the ninth largest car and truck producer in the world and the largest motorcycle manufacturer. Although its largest producers are partnered in joint ventures with several major world manufacturers, most of the technologies currently used in Chinese-manufactured vehicles are incorporated into the vehicle designs by the joint venture partners. In its five-year plan for the automotive industry the Chinese government has laid out an ambitious program of industry consolidation in order to produce cars that will be competitive in international markets and will not depend on joint venture partners for key technologies. The plan sets clear targets for emissions control, safety, and fuel efficiency. And it endorses research efforts on advanced technologies such as electric, hybrid, and fuel cell power sources. But China faces many challenges in its effort to produce an indigenous vehicle that is clean, efficient, affordable, and internationally competitive. The major barriers are: The investment by domestic manufacturers in research and development (R&D) is far below that of foreign competitors. Even though China’s car market has grown rapidly, it is still many

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Personal Cars and China years away from being large enough to provide domestic car manufacturers with revenue sufficient to support a major R&D effort. Research facilities, both inside and outside of the Chinese automotive industry that could be devoted to automotive research and development are limited in contrast to the facilities available to original equipment manufacturers (OEMs) around the world. Even if the physical facilities existed, it remains to be seen whether enough engineers and scientists could be mobilized to carry out the necessary research and development. Most of the existing Chinese companies are large, state-owned enterprises that are required to adhere to practices that increase their costs and make them noncompetitive, such as providing housing, schools, and other employee services. Under terms imposed on members of the WTO, China must discard measures intended to protect an indigenous industry from foreign imports, such as tariffs on vehicles and components. Quotas and import licenses must be eliminated and tariffs reduced by factors of two to four from present levels. These changes, to be phased in over a five-year period, will bring tremendous competitive pressure to bear on China’s motor vehicle industry, which enjoys few economies of scale. Some analyses described in Chapter 2 suggest that China’s domestic motor vehicle production will have changed little by 2005, but both vehicle imports and auto component exports will grow. The implication is that some of the motor vehicle growth over the five-year period from 2001 to 2005 will result from imported vehicles, signaling that China’s motor vehicle industry could face strong competition in its domestic markets during this period. The future structure of the Chinese automotive industry will likely include a combination of the following forms: stand-alone indigenous OEMs Chinese enterprises, each in partnership in a single distinct joint venture Chinese enterprises, each in partnership in several joint ventures, including some overlap of joint venture members among the various Chinese enterprises, which is common today motorcycle or farm equipment companies capable of developing a small car wholly owned foreign subsidiaries with the capability to manufacture new vehicles small or modest-size entrepreneurial Chinese companies that provide engineering support to all of the various enterprises in China.

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Personal Cars and China Although the first of the alternatives—stand-alone indigenous enterprises—has been assigned a definite role in the five-year plan, it is unlikely that current stand-alone companies will be able to achieve the level of technological independence needed without drastic restructuring. For the next two alternatives, both of which involve some form of a joint venture, it is important to recognize that the technology contained in the world-class cars and trucks currently manufactured in China has been provided largely by the joint ventures with multiple partnerships. But these joint ventures have not provided for the transfer of the intellectual property that would have allowed the Chinese members of the joint ventures to develop their own capabilities. With China’s accession to the WTO, imported vehicles of higher technical content may displace the Chinese-made cars from the marketplace. The second form—Chinese enterprises, each in a single joint venture—would have the benefit of allowing a close working relationship to develop between the joint venture partners. Such a relationship could lead to the transfer of knowledge and the building of a technical capability in the Chinese partner. The third form, a joint venture with multiple partners, is the most common one today, but it generally has not resulted in the transfer of technology. The fourth form—the entry of either motorcycle or farm equipment manufacturers into the small car market—represents an interesting alternative for China. Many of these companies are freestanding, successful developers of products for their markets. These two industries could become an important part of the restructured automotive industry. With China’s entry into the WTO, the fifth form—wholly owned foreign subsidiaries in China—is likely to appear for the first time in modern history, and even some companies that are presently joint venture partners of Chinese firms may find that this is a more advantageous way to participate in the growing Chinese market. The sixth form of the industrial complex is the small or modest-size indigenous entrepreneurial company able to provide engineering support to all of the various Chinese enterprises. These independent engineering companies can provide important consulting and development capabilities. Recommendation A competitive Chinese industry must have access to the results of research on both conventional and advanced technologies if an efficient, lowemission China car is to benefit from technological advancements. Agreements and relationships with joint venture partners should be restructured to allow the Chinese partner to participate more fully in re-

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Personal Cars and China search and development. Greater participation may require limiting the partnership to one foreign company per Chinese enterprise, with appropriate sharing of technology and knowledge. TECHNOLOGY RESEARCH AND DEVELOPMENT Designers of efficient, low-polluting vehicles must treat the entire vehicle as a system, including the engine, transmission, tires, vehicle materials, vehicle aerodynamics, and fuels. Life cycle comparisons of the technological alternatives will be an important tool in ensuring that the proper trade-offs are made. This method takes into account the costs of materials, the manufacturing process, fuels, maintenance, and the disposal of obsolete vehicles. Conventional power trains have great potential to both improve engine efficiency and reduce emissions. The technology for removing pollutants from the exhaust of spark ignition engines involves sophisticated electronic controls of the power train to ensure the effectiveness of catalysts. The technology for removing pollutants and nitrogen oxides (NOX) from the exhaust of diesel engines is evolving and will require active management of exhaust system temperature and fuel/air ratios. Over the short to medium term, most energy and emissions improvements are expected to come from dramatically improved conventional power trains. Hybrid power trains also offer improved fuel economy and reduced emissions. The most efficient hybrid systems are able to turn off the engine while idling and to recover the energy that is available during braking through regeneration. However, cost and complexity remain a barrier to broad implementation. Onboard energy storage for vehicle propulsion is becoming a more significant issue for some advanced-technology vehicles. Petroleum fuels have become the primary transportation energy source because of their high energy density and simple storage container requirements. Electric vehicles, at the other extreme, are limited in usefulness because of today’s heavy and bulky battery technologies. Other alternative fuels are presently at a significant disadvantage because of their added cost or lack of infrastructure. Worldwide, many companies are investigating fuel cells as alternative power sources for vehicles, and the Chinese government has announced a RMB880 million (over $100 million) fund to support research on fuel cells and other technologies. Although the fuel cell offers the potential advantage of no emissions, the technology is in the early stages of development. Hydrogen, the most promising fuel for the fuel cell, is available from several sources, but the infrastructure to deliver it to vehicles is not in place. Vehicle-mounted reformers, which could use gasoline or

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Personal Cars and China methanol and convert them to hydrogen, add weight, complexity, and cost, and reduce overall efficiency and increase emissions. The cost of the fuel cell system, including the cost of the fuel cell and its fuel, must be reduced by at least an order of magnitude before it represents a viable commercial product. In addition, providing the infrastructure to supply hydrogen to a geographically dispersed customer base will cost many hundreds of billions of dollars. Finally, although the Chinese government has examined the suitability of domestic material resources for manufacture of today’s vehicles, similar analyses should be undertaken for the materials that may be needed for the next generation of vehicles. Furthermore, provision should be made for recycling the waste streams generated from scrapped vehicles. Recommendations Manufacturers around the world are seeking significant improvements in conventional automotive technologies, and Chinese manufacturers risk falling behind if they fail to sustain comparable research efforts on conventional power train systems. The Chinese automotive industry also should strengthen its efforts to develop improved diesel and spark ignition technology in cooperation with its joint venture partners. Researchers should focus on, among other things, advanced gasoline and diesel engine technologies, an ultra-low-emission gasoline engine system, diesel particulate filters, de-NOx catalysts, selective catalytic reduction (SCR), and improved in-engine combustion management. Industry must develop the capability to model the vehicle power train system in order to optimize its overall performance, including fuel economy, emissions, and vehicle drivability. Government, in partnership with industry, should continue to support research on emerging and advanced technologies such as hybrids, fuel cells, and battery electric vehicles. Industry can then maintain expertise in state-of-the-art developments and contribute to breakthroughs as they occur. Government, guided by industry, should not single out particular technological solutions prematurely, but should continue to support and encourage the development of a variety of emerging and advanced technologies that are being explored internationally. The long-term, sustainable research and development needed for emerging and advanced technologies requires sustained financial and intellectual support. So that it can adopt European state-of-the-art emissions standards, which the government has identified as its next level of emissions control, China should adopt fuel quality standards identical to those of the European Union. Achieving these will require that the sulfur levels in fuels be reduced. Because China’s present refineries are limited in their capacity to

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Personal Cars and China produce the cleaner grades of diesel and gasoline fuels that will be required to meet new emissions standards, major upgrades and the construction of new refineries, improved production efficiencies, and expanded foreign partnerships will be required. Substantial investments by the domestic industry, the private sector, and the government will be needed to support the transition of China’s petroleum industry into a competitive supplier of transportation fuels. The “China car” envisioned by the government should utilize technologies that allow high fuel efficiency, while providing reliable, comfortable (room for four passengers and some baggage), and safe transportation at an affordable cost. It also should have some attractive attributes that differentiate it from most imported cars in the growing Chinese market. Although at present there are no fuels that could serve as a practical and competitive large-scale alternative for petroleum fuels over the next decade, research and development on alternative fuels and the associated vehicle technologies, particularly those for which China has a comparative advantage such as hydrogen and liquid fuels from coal, is a wise investment for the future. Serious research in this area will allow the Chinese automotive industry to stay abreast of worldwide developments and perhaps develop new energy sources. URBAN ISSUES Urban residents, with their higher-than-average incomes, are able to buy automobiles earlier and at a higher rate than the general population. As a result, rapid motorization is likely to produce its earliest and severest problems in cities. Because urban vehicle fleets grow more rapidly than urban road length, city-wide congestion increases quickly, leading to some adjustments in urban land use as urban populations move farther from city centers. These patterns are already observable in China’s largest cities. Chinese cities have an especially delicate balance of space use. The experience of cities that have undergone rapid motorization in the past reveals that a growing vehicle fleet results in lower average transit velocities, longer commuting times, and larger areas affected by congestion. As described in Chapter 6, Chinese cities have very high residential densities, and a low proportion of space is dedicated to streets, in accord with the urban designs of two decades ago when bicycles were expected to dominate transport. As a result, these cities are subject to new social forces as increasing congestion, pollution, and the desire for more open space drive people to seek employment and housing at the urban periphery, newly accessible by increased motorization. The net effect of these forces, for better or worse, will be decentralization of employment and residence in the larger cities.

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Personal Cars and China Cities in other countries have responded to these challenges by constructing new urban highways, projects sometimes undertaken by concession to private firms and financed by tolls. When the value of land for parking becomes competitive with that for other uses, investors will seek property for use as private parking spaces near city centers. Municipalities also will build additional public transit facilities, principally for people still without cars in increasingly auto-oriented cities. Worldwide experience shows that few trip makers will change from auto to public transportation in the short run, but employers will increasingly provide private bus services to get employees to work. Eventually the cities will reach new equilibria within expanded geographical areas. Over the short and medium term in China, automobiles will be available only to a minority of the population because of cost, even in urban areas. But the adverse effects of rapid motorization—such as the increased congestion in the cities which will reduce the performance of public transport—will affect the nonmotorized majority as well. Bicycle use will become less convenient and more dangerous, and exposure to air pollution will rise. These effects may become an equity issue with political or social consequences. A debate between those attempting to accommodate motor vehicle traffic and those defending bicycles as effective and environmentally benign transport for lower-income people has already begun in China. To relieve congestion and limit pollution, some cities have adopted additional local restrictions on the use of two-wheeled motor vehicles and trucks, in some cases banning them altogether at some parts of the day. A wider concern for the efficiency of the economy will likely engage the central government in these issues. Recommendations To benefit from the advantages of motorization and avoid its potential problems, municipalities must initiate or expand comprehensive development planning that would embrace transportation, urban land use, and urban services. Such planning should discourage excessive decentralization and promote orderly urban growth. China’s cities should provide additional road space and improve traffic management, while minimizing social disruption to the extent possible. The new construction should not be limited to ring roads and flyover highways; arterial roads also should be improved to relieve congestion in the neighborhoods and business areas, while increasing the proportion of urban space dedicated to transportation. Meanwhile, the available mechanisms for road pricing and other forms of traffic demand management should be explored to provide incentives for more efficient use of road

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Personal Cars and China space and increased financial resources for road maintenance and construction. Systematic attention to parking requirements and safety will be required as well. As motorization proceeds rapidly in China, it is imperative that more attention be directed to providing public transportation that is convenient, comfortable, comprehensive, safe, and inexpensive. China must create a balance among public transportation, nonmotorized vehicles, and private cars to ensure that the nondriving majority, including bicyclists, is adequately served. ENVIRONMENTAL AND HEALTH ISSUES Increasingly stringent regulations are being imposed on emissions in all developed countries. Although China has not imposed the severest standards, it is following the lead of other countries in requiring automakers to reduce polluting emissions (see Chapter 7). China is anticipating that its total vehicle fleet, not including motorcycles, will increase by three to seven times between 2002 and 2020. The number of automobiles in the fleet is expected to increase by three to nine times in the same time period. Estimates of the growth of emissions and fuel consumption between 2002 and 2020 based on the midlevel growth scenario described in Chapter 2 (8 percent annual growth of GDP) indicate that motor vehicle emissions of carbon dioxide (CO2) will more than triple, of carbon monoxide (CO) and hydrocarbons (HC) will almost triple, and of nitrogen oxide (NOx) and particulate levels will stay at their currently high levels. If the highest-growth scenario (10 percent annual growth of GDP) should occur, even with the current emissions standards (European Emission Standard II, or Euro II, by 2004) and with the 10 percent improvement in vehicle fuel economy specified in the five-year plan, emissions of all pollutants will increase. China should therefore continue to limit vehicle emissions. If growth can be constrained to the medium case, and if emissions standards are aligned with those of the European Union as planned by 2010, vehicle emissions of total hydrocarbons (THC), carbon monoxide, nitrogen oxides, and particulate matter may eventually fall. An aggressive vehicle fuel efficiency program, possibly including an increase in the proportion of diesel-powered vehicles, also will be required to slow the growth of CO2 emissions. Recommendations If China is to mitigate its hazardous air pollution problem and the serious health consequences, the Chinese government will need to adopt more stringent vehicle emissions standards nationwide. China should align it-

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Personal Cars and China self with the European Union’s new vehicle emissions standards as quickly as possible but no later than 2010. Meeting future emission standards will require a reduction in sulfur levels in vehicle fuels to below 2001 levels, in line with European requirements. THE ROLE OF GOVERNMENT In China, increased motorization, and the regulation and services it requires, will strain government at all levels. The various agencies and institutions that deal with the environment, public health, traffic management and policing, trade, licensing, and regulation will need to be appropriately staffed and funded for their increased responsibilities. In the United States, Europe, and other industrialized countries, governments have pursued a variety of means to advance technological change in the automotive industry and alleviate negative side effects. Sometimes they have prescribed specific technologies, such as seat belts and other safety features, but the preferred and most effective tool in reducing the adverse impacts of vehicles on the environment has generally been performance standards that allow industry to devise innovative ways to comply. Governments use a variety of fiscal instruments, in addition to command and control regulation, to influence the choice of vehicle attributes such as low emissions and good fuel economy: Vehicle taxes have been used to achieve various objectives, ranging from promoting one technology over another (e.g., diesel versus gasoline cars), to encouraging consumers to select cleaner over dirtier vehicles and more efficient over less efficient vehicles. Fuel taxes also can be used to encourage consumers to select more efficient over less efficient vehicles or diesel over gasoline. Direct public investment (DPI) can assist industry in developing technologies with certain attributes. One example is the U.S. Partnership for a New Generation of Vehicles (PNGV) program in which government joined industry in funding research. DPI also may be used to stimulate investment in research and development and to support the appropriate industrial structure. It is observed that in many areas China has put in place regulations (e.g., on emissions, fuel quality, and crash-worthiness) that are quite advanced and draw on the experience of other countries. The principle of decentralization of power and responsibility, with assignment of responsibilities to levels of management or government where the relevant knowledge resides, has been used effectively for con-

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Personal Cars and China trol and regulation in the United States and Europe. Under this principle, the national government retains responsibility for performance or technology standards for the entire country in order to maintain a single domestic vehicle market. While doing so, it takes into account externalities such as greenhouse gas production, national energy security, macroeconomic management and trade, and market failures (e.g., a shortage of available insurance protection). Provincial and local governments retain responsibility for vehicle use and traffic management. In China, this division of responsibility between national and local authorities would enable manufacturers to design vehicles for sale throughout the country and benefit from economies of scale, while enabling local officials to determine the best management of vehicle use to protect local environments and limit congestion. To increase the technological options that comply with clean air and efficiency regulations, the U.S. and European governments have entered into partnerships with industry for the development of advanced automotive technologies. The U.S. PNGV program illustrates the strengths and weaknesses of the approach (see Chapter 8). The successes generated by PNGV depended on leveraging ongoing government and industrial R&D programs, especially the capabilities of U.S. government national laboratories, and limiting the collaboration to precommercial technologies. Nevertheless, most of the results of industrial research remained proprietary. The benefits of the program to the country were enhanced by the challenge presented to nonparticipating companies such as Honda and Toyota, which advanced their own technology development and put efficient hybrid cars on the market ahead of the U.S. manufacturers. In January 2002 the U.S. government announced its intention to cancel the program and replace it with one directed at fuel cells and hydrogen fuel. For the Chinese government, its focus on achieving automotive technological improvements may become irrelevant unless high-quality fuel is available on a national scale. In this transitional period, China has competing national and local fuel specification standards. Such competition introduces production complications and inefficiencies for industry that may be mitigated with national standards that are consistent with global standards. Variability in fuels to meet local climatic conditions both seasonally and regionally can be managed within the context of national standards. Recommendations In view of the very rapid growth forecasted for China’s vehicle fleet for the next two decades, environmental and fuel consumption patterns in China could face severe stress, with serious public health and economic conse-

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Personal Cars and China quences, unless vehicle technology is substantially upgraded. National performance standards have been used successfully worldwide as a means of requiring important vehicle attributes such as low emissions, fuel efficiency, and safety. An appropriate mix of performance standards and incentives may enable China to advance from some of the dated technology in use today to the global state of the art in time to mitigate these problems. Furthermore, the Chinese government and the Chinese automotive industry should develop and implement a process that will regularly assess, nationwide, the appropriate levels of vehicle performance standards, fuel standards, vehicle fuel economy standards, and infrastructure. The government could provide incentives to industry and consumers to accelerate progress in meeting emissions and fuel economy targets. To meet the need for new technologies and greater environmental protection, the government should organize and support government laboratories and academic institutions so that they can pursue jointly with industry research and development on new-generation technologies at the precompetitive stage, with the objective of applying innovations to commercial products. To ensure that the necessary capability and competence exists in the automotive industry, the government should support training of technical personnel at all levels. Smaller companies should not be excluded from the process. While this study did not attempt to analyze the full economic consequences of the various actions that will accompany the move toward motorization, the funding requirements will be large. Private expenditures on vehicles and their operating costs will obviously grow. As noted in earlier in this report, both national and local governments will be called on to support major projects. Based on the experience of other countries, annual investments in infrastructure for motorized vehicles are likely to absorb from 1 to 2 percent of GDP and from 5 to 10 percent of public investment—with funds coming from central, provincial, and municipal governments (World Bank, 1994). In addition to road infrastructure, the expansion of joint R&D programs with industry, and of engineering research and development at major universities, will require substantial resources. The committee encourages careful examination of the funding mechanisms that China will use to accomplish its objectives. While endorsing the principle that user fees should be used to finance road facilities, for example through vehicle and fuel taxes, the committee is not prepared to make detailed recommendations about how the infrastructure, technology, and research expenditures associated with motorization should be financed. Because the resource cost of motorization will be

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Personal Cars and China large, the analysis of its appropriate funding will require a review of public revenue and expenditure practices at various levels of government. REFERENCE World Bank. 1994. World Development Report: Infrastructure for Development. New York: Oxford University Press.

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