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9 Findings and Recommendations T his 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 Chinaâs envi- ronment, society, and economy. PATTERNS OF MOTORIZATION Chapter 2 describes how Chinaâs 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. Simi- larly, the fact that paved road length increases as national income in- creases parallels the experience of other countries. If Chinaâs gross do- mestic 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 trans- portation 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. 203
204 PERSONAL CARS AND CHINA Recommendation â¢ 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, au- tomobile 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 accep- tance 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 sev- eral major world manufacturers, most of the technologies currently used in Chinese-manufactured vehicles are incorporated into the vehicle de- signs by the joint venture partners. In its five-year plan for the automotive industry the Chinese govern- ment has laid out an ambitious program of industry consolidation in or- der 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, hy- brid, 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: â¢ The investment by domestic manufacturers in research and devel- opment (R&D) is far below that of foreign competitors. â¢ Even though Chinaâs car market has grown rapidly, it is still many
FINDINGS AND RECOMMENDATIONS 205 years away from being large enough to provide domestic car manufactur- ers with revenue sufficient to support a major R&D effort. â¢ Research facilities, both inside and outside of the Chinese automo- tive industry that could be devoted to automotive research and develop- ment are limited in contrast to the facilities available to original equip- ment manufacturers (OEMs) around the world. â¢ Even if the physical facilities existed, it remains to be seen whether enough engineers and scientists could be mobilized to carry out the nec- essary research and development. â¢ Most of the existing Chinese companies are large, state-owned en- terprises 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 im- ports, 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 pe- riod, will bring tremendous competitive pressure to bear on Chinaâs mo- tor vehicle industry, which enjoys few economies of scale. Some analy- ses described in Chapter 2 suggest that Chinaâs 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 Chinaâs 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: 1. stand-alone indigenous OEMs 2. Chinese enterprises, each in partnership in a single distinct joint venture 3. Chinese enterprises, each in partnership in several joint ventures, including some overlap of joint venture members among the various Chi- nese enterprises, which is common today 4. motorcycle or farm equipment companies capable of developing a small car 5. wholly owned foreign subsidiaries with the capability to manufac- ture new vehicles 6. small or modest-size entrepreneurial Chinese companies that pro- vide engineering support to all of the various enterprises in China.
206 PERSONAL CARS AND CHINA Although the first of the alternativesâstand-alone indigenous enter- prisesâhas been assigned a definite role in the five-year plan, it is un- likely 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 ven- ture, 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 ven- tures to develop their own capabilities. With Chinaâs accession to the WTO, imported vehicles of higher technical content may displace the Chi- nese-made cars from the marketplace. The second formâChinese enterprises, each in a single joint ven- tureâwould 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 formâthe entry of either motorcycle or farm equipment manufacturers into the small car marketârepresents an interesting alter- native for China. Many of these companies are freestanding, successful developers of products for their markets. These two industries could be- come an important part of the restructured automotive industry. With Chinaâs entry into the WTO, the fifth formâwholly owned for- eign subsidiaries in Chinaâis likely to appear for the first time in modern history, and even some companies that are presently joint venture part- ners 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 in- digenous entrepreneurial company able to provide engineering support to all of the various Chinese enterprises. These independent engineering com- panies can provide important consulting and development capabilities. Recommendation â¢ A competitive Chinese industry must have access to the results of re- search on both conventional and advanced technologies if an efficient, low- emission China car is to benefit from technological advancements. Agree- ments and relationships with joint venture partners should be restructured to allow the Chinese partner to participate more fully in re-
FINDINGS AND RECOMMENDATIONS 207 search and development. Greater participation may require limiting the partnership to one foreign company per Chinese enterprise, with appro- priate sharing of technology and knowledge. TECHNOLOGY RESEARCH AND DEVELOPMENT Designers of efficient, low-polluting vehicles must treat the entire ve- hicle as a system, including the engine, transmission, tires, vehicle materi- als, vehicle aerodynamics, and fuels. Life cycle comparisons of the tech- nological 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 obso- lete vehicles. Conventional power trains have great potential to both improve en- gine efficiency and reduce emissions. The technology for removing pol- lutants from the exhaust of spark ignition engines involves sophisticated electronic controls of the power train to ensure the effectiveness of cata- lysts. The technology for removing pollutants and nitrogen oxides (NOX) from the exhaust of diesel engines is evolving and will require active man- agement 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 en- gine while idling and to recover the energy that is available during brak- ing 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 todayâs heavy and bulky battery technologies. Other alternative fuels are pres- ently at a significant disadvantage because of their added cost or lack of infrastructure. Worldwide, many companies are investigating fuel cells as alterna- tive power sources for vehicles, and the Chinese government has an- nounced a RMB880 million (over $100 million) fund to support research on fuel cells and other technologies. Although the fuel cell offers the po- tential advantage of no emissions, the technology is in the early stages of development. Hydrogen, the most promising fuel for the fuel cell, is avail- able from several sources, but the infrastructure to deliver it to vehicles is not in place. Vehicle-mounted reformers, which could use gasoline or
208 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 todayâs 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 re- cycling the waste streams generated from scrapped vehicles. Recommendations â¢ 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 con- ventional 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 par- ticulate 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. â¢ 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 tech- nologies that are being explored internationally. The long-term, sustain- able research and development needed for emerging and advanced tech- nologies requires sustained financial and intellectual support. â¢ 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 re- duced. Because Chinaâs present refineries are limited in their capacity to
FINDINGS AND RECOMMENDATIONS 209 produce the cleaner grades of diesel and gasoline fuels that will be re- quired to meet new emissions standards, major upgrades and the con- struction of new refineries, improved production efficiencies, and ex- panded 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 Chinaâs petroleum industry into a competitive supplier of transportation fuels. â¢ The âChina carâ envisioned by the government should utilize technolo- gies 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 dif- ferentiate it from most imported cars in the growing Chinese market. â¢ Although at present there are no fuels that could serve as a practical and competitive large-scale alternative for petroleum fuels over the next de- cade, 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 invest- ment for the future. Serious research in this area will allow the Chinese automotive industry to stay abreast of worldwide developments and per- haps 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 Chinaâs 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 veloci- ties, longer commuting times, and larger areas affected by congestion. As described in Chapter 6, Chinese cities have very high residential densi- ties, 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.
210 PERSONAL CARS AND CHINA Cities in other countries have responded to these challenges by con- structing new urban highways, projects sometimes undertaken by con- cession 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. Municipali- ties also will build additional public transit facilities, principally for people still without cars in increasingly auto-oriented cities. Worldwide experi- ence shows that few trip makers will change from auto to public transpor- tation 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 avail- able only to a minority of the population because of cost, even in urban areas. But the adverse effects of rapid motorizationâsuch as the increased congestion in the cities which will reduce the performance of public trans- portâwill affect the nonmotorized majority as well. Bicycle use will be- come 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 mo- tor vehicle traffic and those defending bicycles as effective and environ- mentally 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 â¢ To benefit from the advantages of motorization and avoid its potential problems, municipalities must initiate or expand comprehensive develop- ment planning that would embrace transportation, urban land use, and urban services. Such planning should discourage excessive decentraliza- tion and promote orderly urban growth. â¢ Chinaâs 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 mecha- nisms for road pricing and other forms of traffic demand management should be explored to provide incentives for more efficient use of road
FINDINGS AND RECOMMENDATIONS 211 space and increased financial resources for road maintenance and con- struction. Systematic attention to parking requirements and safety will be required as well. â¢ As motorization proceeds rapidly in China, it is imperative that more attention be directed to providing public transportation that is conve- nient, comfortable, comprehensive, safe, and inexpensive. China must cre- ate 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 motor- cycles, 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) indi- cate 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 cur- rently 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 per- cent 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 â¢ 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-
212 PERSONAL CARS AND CHINA self with the European Unionâs 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 manage- ment and policing, trade, licensing, and regulation will need to be appro- priately staffed and funded for their increased responsibilities. In the United States, Europe, and other industrialized countries, gov- ernments 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 re- ducing 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 com- mand and control regulation, to influence the choice of vehicle attributes such as low emissions and good fuel economy: â¢ Vehicle taxes have been used to achieve various objectives, rang- ing from promoting one technology over another (e.g., diesel versus gaso- line cars), to encouraging consumers to select cleaner over dirtier vehicles and more efficient over less efficient vehicles. â¢ Fuel taxes also can be used to encourage consumers to select more efficient over less efficient vehicles or diesel over gasoline. â¢ 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 ad- vanced 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-
FINDINGS AND RECOMMENDATIONS 213 trol and regulation in the United States and Europe. Under this principle, the national government retains responsibility for performance or tech- nology standards for the entire country in order to maintain a single do- mestic vehicle market. While doing so, it takes into account externalities such as greenhouse gas production, national energy security, macroeco- nomic 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 divi- sion of responsibility between national and local authorities would enable manufacturers to design vehicles for sale throughout the country and ben- efit 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 auto- motive 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 labora- tories, and limiting the collaboration to precommercial technologies. Nev- ertheless, most of the results of industrial research remained proprietary. The benefits of the program to the country were enhanced by the chal- lenge presented to nonparticipating companies such as Honda and Toyota, which advanced their own technology development and put effi- cient hybrid cars on the market ahead of the U.S. manufacturers. In Janu- ary 2002 the U.S. government announced its intention to cancel the pro- gram and replace it with one directed at fuel cells and hydrogen fuel. For the Chinese government, its focus on achieving automotive techno- logical improvements may become irrelevant unless high-quality fuel is available on a national scale. In this transitional period, China has compet- ing national and local fuel specification standards. Such competition intro- duces 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 â¢ In view of the very rapid growth forecasted for Chinaâs 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-
214 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 perfor- mance 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. â¢ To meet the need for new technologies and greater environmental protec- tion, the government should organize and support government laborato- ries and academic institutions so that they can pursue jointly with indus- try research and development on new-generation technologies at the precompetitive stage, with the objective of applying innovations to com- mercial products. To ensure that the necessary capability and competence exists in the automotive industry, the government should support train- ing 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 conse- quences of the various actions that will accompany the move toward mo- torization, 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 investmentâwith 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 re- search and development at major universities, will require substantial re- sources. The committee encourages careful examination of the funding mechanisms that China will use to accomplish its objectives. While en- dorsing the principle that user fees should be used to finance road facili- ties, for example through vehicle and fuel taxes, the committee is not pre- pared 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
FINDINGS AND RECOMMENDATIONS 215 large, the analysis of its appropriate funding will require a review of pub- lic revenue and expenditure practices at various levels of government. REFERENCE World Bank. 1994. World Development Report: Infrastructure for Development. New York: Oxford University Press.