Enhancing  sustainable  innovation  capacity

Governing the Transition to a Green Economy 161 When looking where people are working in the value chain, future problems of Chinese

electro mobility efforts arise on the horizon: Currently, workers are needed researching and developing the new technologies, which are required before the low-cost production can scale up. However, a lack of well-trained workers is a problem in China. BYD tackled it through job rotation (Kasperk et al., 2010). While this might work for a single company, it is not a working formula to solve the problem of an entire industrial sector that is supposed to grow.

Since the lack of technological solutions partly explains the lack of progress in China, the government needs to find ways to improve the level of training. The car producers must grow into interesting employers that attract high-skilled engineers.

development of a vehicle market that both meets and sets global standards” (Earley et al., 2011: 10). Chinese authorities have various means at their disposal to force the hand of international car manufacturers.

4.2.3.2.1. Domestic  invention  is  falling  behind  

The Chinese government has funded R&D efforts to strengthen electro mobility for more than a decade. This reflects the emphasis that the public actors put on the technology as well as

“China’s long-term commitment to innovation through sustained programmatic funding rather than an ad hoc approach“ (Gordon et al., 2010: 27). The Ministry of Science and Technology has funded the 863 programme since 2001. Overall, 290 million USD (221 million EUR) were spent during the first phase between 2001 and 2005 (Gong et al., 2012). The outcome were 26 national standards and 796 patents as well as first prototypes of NEVs (Gong et al., 2012, Kubach, 2011). Little is known about the quality of these patents, though. In 2006, electro mobility assumed a prominent role in the plans for the transport sector that were laid out in the ‘National Medium- and Long-Term Programme for Science and Technology Development (2006-2020)’ (State Council of the People's Republic of China, 2006). The result were additional investments of 1.5 billion USD (1.15 billion EUR) during the 11^th FYP from 2006 to 2010 (Gong et al., 2012). As seen above, the results were first public experiments with the new technology with an emphasis on public demand. The 2009 Automotive Industry Restructuring and Revitalization Plan invested three billion RMB (0.36 billion EUR) in researching key technologies needed for electro mobility out of an overall investment of ten billion RMB (1.2 billion EUR) into the car industry between 2009 and 2011 (Earley et al., 2011, Zheng et al., 2012). Hence, electro mobility received a considerable share of the overall transport research budget in this period. However, by mid-2011 it was not clear how much money was already spent and on which projects (Kokko and Liu, 2012). Science Minister Wan Gang reports that by March 2011, 57 standards on electro mobility existed and 59 were considered (cited in Tagscherer, 2012). As mentioned, since the publication of the 12^th FYP, the Chinese government has announced to spend another 50 billion RMB (6.1 billion EUR) in support of R&D. This makes China the global leader in R&D budgets on electro mobility (roughly 0.17% of GDP) in absolute and relative terms (Bernhart et al., 2012). However, private R&D efforts are negligible.

These efforts do not result in sufficient output. Data presented by the Organisation for Economic Co-operation and Development (2011b) shows that China still lags significantly behind in alternative fuel vehicle patents with less than 1% of the international share. A

Governing the Transition to a Green Economy 163 similar situation can be witnessed in battery research as China is the world leader in

production but continues to lag behind in patent registrations and high-tech production capacities (Earley et al., 2011). One possible explanation is that China spends considerably less money than it announces. An alternative argument is that the structural deficiencies of the Chinese innovation system are causing this poor performance. While the funding is more easily available to SOEs, the discussion of BYD has shown that they seem to have problems generating innovations, which is partly explained by excessive government meddling. The strong state involvement in the innovation process does not allow for research in areas that are promising but rather follows government directions. Furthermore, the decision-makers seem to underestimate the technological complexity of electro mobility which increases the pressure on engineers to develop solutions that, when tested under real-life circumstances, are insufficient. For example, the Toyota Prius took several years to develop. However, under the Chinese authoritarian regime the engineers receive orders from the top and cannot report delays.

Because of weak domestic innovation capacities, China depends on international collaboration and forced technology transfer. It has put in place various international cooperation agreements with key actors in the United States and the European Union (Earley et al., 2011). However, it does largely rely on the model of “import/assimilate/re-innovation”

(Gordon et al., 2010: 28). As Chinese companies depend on foreign technology, the government requires foreign car companies that want to sell their cars on the Chinese market to produce them in joint ventures with local companies. In the past, these joint ventures have not necessarily resulted in the expected technology transfer as foreign companies have transferred mostly outdated technologies because pollution requirements were too lax (Gallagher, 2006). Hence, the government has tightened the regulatory framework.

Nowadays, foreign car manufacturers have to transfer one key technology for either battery, engine or electronics to a joint venture in order to gain access to the Chinese market (Hannon et al., 2011, Spiegel Online, 2011). Otherwise, they are not included on the list of vehicles that qualify for government subsidies, which reduces their appeal to consumers because of their higher price. A good example of this approach is the ‘Chevrolet Volt’, a BEV (Stewart et al., 2012). The Chinese government did not include it on the mentioned list of models that qualify for state support because it was not produced by a Chinese joint venture and Chevrolet did not transfer a core category. Later, ‘General Motors’, the owner of Chevrolet, entered a joint venture with a Chinese car maker and promised to “transfer battery and other electric car technology to the venture” (Bradsher, 2011). While General Motors argues that the

developments are unrelated, this seems implausible. The Chinese government uses economic incentives to pressure foreign companies to enter cooperation agreements with Chinese companies to overcome its domestic innovation problems. Nonetheless, international managers argue that the transfer requirement stalls the development of electro mobility in China as non-Chinese companies are not willing to comply (Spiegel Online, 2011).

While this forced technology transfer is a clear breach of World Trade Organisation rules according to Stewart et al. (2012), the Chinese car market has become so important internationally that many international car manufacturers comply with Chinese demands to keep market access. Hence, they might be forced to transfer key technologies to China where their intellectual property rights are hardly protected. At the same time, they are still in a good position as long as they hold technological advances that the Chinese industry depends upon.

Hence, international car manufacturers prefer to bring development technologies to China rather than the initial research that is more difficult to shield.

4.2.3.2.2. Attempts  to  bring  electro  mobility  innovations  to  the  market   Electric vehicles are only entering the marketplace in China similar to most other international markets that stand at the beginning of the large-scale introduction. While it was true for some time that the Chinese government neglected the demand side and over focused on the supply side by researching all technical details as argued by Gallagher (2006), this is no longer the case since the implementation of subsidies for private and public consumers.

Hence, despite all the criticism of the transmission belts, they have started adapting to their weaknesses. However, the international comparison presented by Bernhart et al. (2012) shows that in particular the Chinese industry is underdeveloped. This shows that the car industry has to continue to catch up.

In an attempt to make use of the strong impact of the state, the ‘10 cities, 1,000 vehicles programme’ focused on public utility vehicles like busses and garbage trucks, which are better capable of taking care of range limitations. In addition, public fleets are easier to survey and monitor and public transport reaches more people (Zheng et al., 2012). Hence, the Chinese decision-makers tried to rely on public procurement. While many lessons were drawn in the process, the project has not reached expectations. A key explanation for the poor performance of the demonstration project is that many of the qualifying vehicles exist in theory only. This means that the cities could not buy the vehicles, even if they wanted to do so

Governing the Transition to a Green Economy 165 (Gong et al., 2012). Hence, solving this problem requires industry to develop attractive

vehicles, which can take some time given the technological difficulty.

Another problem is the lack of coherent standards for electric mobility technology. China has been working on standards since 2007 (Kubach, 2011) but “nationwide standards for important components are not being produced quickly enough” (Earley et al., 2011: 27).

Given the regionalisation of production capacities and the high number of market actors, this hampers the development of a coherent technology that creates a single market. For example, within China various charging plugs are used. Hence, the aim is to speed up the standard setting process in order to establish them before the European Union and United States do so (Kasperk et al., 2010). This leadership position would increase pressure on other international market participants to follow the Chinese standards if they want to enter this large market.

McKinsey & Company (2012a) sees the biggest reason for slow sales in the Chinese strategy that overemphasises pure BEVs, which are technically difficult to develop. It argues that China needs to realign its policy framework in order to focus more strongly on various types of HEVs. While BEVs will only become financially competitive in ten years, cars with range extenders could gain significant market shares by 2014 (McKinsey & Company, 2012a). This recommendation runs counter to the initial Chinese strategy to become world market leader in a completely new technology. However, the recent developments seem to indicate that China is slowly moving into this direction that is favoured by the Ministry of Industry and Information Technology. This raises the question whether China will be able to catch up with Japanese producers that are worldwide leaders in HEV technology. Hence, this move towards HEVs could increase market demand but challenge the Chinese electro mobility industry in trying to catch up with advanced technology.

4.2.3.2.3. Little  experience  with  diffusion  

Since electric vehicles in China as well as the rest of the world are not yet market ready, large-scale diffusion has not yet started. However, the rapidly expanding Chinese car market underlines the potential. The key argument to explain the current lack of diffusion of electric vehicles in the Chinese transport sector is the lack of vehicles that serve the needs of the consumers at cost-competitive prices. The Development Research Center Enterprise Institute of the State Council of the People's Republic of China (2012b) published a white paper in 2012 that elaborates business models to overcome the demand problems. They focus on

battery swapping as a cheap alternative to increase range and focus on regional car rental networks.

Additional arguments to the slow market penetration have been identified above and are not unique to China but stall the international transition to an electrified transport sector:

• The range of electric vehicles is limited and the necessary charging infrastructure does not yet exist. Hence, it is a promising sign that Chinese grid providers, State Grid and Southern Grid, have announced plans to rollout the necessary charging infrastructure. If they achieve the planned 4,000 charging stations by 2015 and 10,000 by 2020, this will make electric vehicles much more attractive as it reduces range limitations (Hannon et al., 2011). However, this is only possible because both companies are state owned and the government wants them to go ahead even though the economic calculations would oppose such a move.

• People are not used to electric vehicles and are rather interested in luxury imports and sports cars which they know from car salons and mainstream media (Stinson, 2012).

Nudging mechanisms can address these decision parameters. For example, electric vehicles have been exempted from the requirement to have a license in order to receive licence plates that are normally difficult to obtain in large Chinese cities (Xinhua, 2011). Some cities in China also think about regulatory initiatives that would ban certain types of ICE vehicles from parts of the cities, which would increase the incentives to drive an electric vehicle. This has been a major driver for electric bikes.