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As recently reported, PHEV sales in China are growing at an astounding rate, driving new energy vehicle (NEV) market share above 53% in the largest car market. New PHEVs are being introduced, as well as new batteries designed specifically for these applications.
At the same time, changes to China’s purchase tax exemption made it more difficult for PHEVs to qualify this year.
So, why is this happening? Having followed the situation for a while, I’ll try to provide an explanation. For simplicity’s sake, the term “PHEV” will also include EREVs, as the distinction is somewhat confusing.
It’s the Only Car in the Household in China
A recent study by Experian found that 89% of EV-owning households in the US have more than one car. Of EV-owning households, 81% also owned an ICE car, 14% also owned a hybrid car, and just 12% also owned another EV (the numbers add up to more than 100% because some households own more than two cars).
In contrast, as of 2022, China had 43.5 cars per 100 households. The sole car of a household tends to serve a different role. The commuting role that EVs often play in the US is typically filled by electrified mass transit in China. While some EV-owning households in the US would switch to their ICE vehicle for a road trip, that is typically not an option in China. This helps to explain why PHEVs are taking share from ICE in China, while BEV sales are also growing, albeit at a slower rate.
The overall growth in the number of cars on Chinese roads is limited, as older cars are taken off the road by strict emissions standards and scrappage incentives, while some large cities restrict the number of license plates available, especially for ICE vehicles. At the same time, mass transit keeps becoming more attractive.
PHEVs Have Gotten Much Better in China
In the West, PHEVs tend to be modified ICE vehicles. Electric range tends to be insufficient for daily needs. The most capable PHEV that many of us had experience with was the Chevy Volt, which was pulled from our market years ago while the technology accelerated in China.
The latest PHEVs in China from BYD, Li Auto, and others have become far more advanced. For example, the BYD Qin L with its fifth-generation DM-I system made headlines last May for a claimed 2100 km (1305 miles) of combined range, and had several journalists beat that incredible number. The Qin L also offers more electric range than the Volt and much more efficient packaging. While operating solely on electricity, it is rated at 10.7kWh/100km CLTC, which is better than most BEVs tested on the same standard, even Tesla models that have a reputation for being very efficient. Once the battery runs out, the gasoline engine gets a claimed thermal efficiency of over 46%, leading to a rating of 2.9l/100km NEDC, or 81 mpg. This is a somewhat optimistic testing cycle, but it still indicates a high rate of efficiency. While not a perfect apples-to-apples comparison, that is also better than the MPGe rating of many BEVs currently on sale in the US.
Once again, all these estimates are imperfect. However, once you consider the lower manufacturing inputs, it is safe to assume that the most efficient and lighter PHEVs in China have lower lifecycle emissions than the least efficient BEVs in the US. This really is not the “worst of both worlds” stereotype that many people have. It is also safe to assume that the most efficient BEVs have even lower total lifecycle emissions, but it is really splitting hairs at that point compared to far less efficient ICE vehicles.
In addition, BYD estimated during the launch of the Qin L and Seal 06 BYD that a typical user would travel on electricity 80% of the time, so most of the miles would be on that more efficient use of electricity.
But is That Realistic? What about That PHEV Study I Heard about in Europe?
You may have heard about a study from the Fraunhofer ISI that found that PHEVs tend to run on gasoline far more than estimated. Undoubtedly, European WLTP estimates do not accurately reflect “real-world” usage.
However, when you dig into the report, much of the difference comes back to the vehicles available. The PHEVs in the study tended to be ICE-based models with limited range. If you look at this chart from the report, PHEVs with over 100 km of electric range (as is common in China) are projected to approach that 80% electricity use for private cars.
But that gets to another major market difference. In Europe, over 60% of car sales are what is known as “company cars.” As Reuter’s describes them: “Companies offer cars as perks for employees, often with significant benefit-in-kind subsidies including offsetting consumer taxes and fuel usage benefits.” According to an ERM study, this amounts to €42 billion in fossil fuel subsidies every year.
As company cars tend to get fuel benefits but not household electricity benefits, there is little economic incentive to charge at home.
The Economics Work Better for PHEVs in China
To further account for the difference, in 2022, the year of the Fraunhofer ISI study, German retail electricity prices had shot up to $0.557/kWh. On the other hand, Chinese electricity prices were $0.078/kWh. While Chinese petroleum prices are also lower than those in Germany, electricity is still far less expensive in comparison. This incentivizes Chinese consumers to use electricity to power their cars as much as possible.
In addition, renewables are driving the cost of electricity down further in China. Many Chinese PHEVs are also capable of DC fast charging, which allows them to take advantage of the 3.2 million+ public charge ports in China, which are mostly DC (compared to 181,000 charge ports in the US, which are mostly AC).
Overall, in a vehicle that can use both gasoline and electricity, barring market distortions, it makes sense to use electricity whenever possible in China.
On the vehicle purchase side of the economic picture, Chinese PHEVs are now less expensive than popular legacy ICE models in China — about half the price of comparable ICE vehicles in the US. And they are also less expensive than comparable BEV models.
Good for China, But What Does This Mean for Me?
BYD is currently in the process of rolling out PHEVs in markets outside of China. These tend to be on the older, less efficient fourth generation DM-i platform. However, they represent a significant improvement over existing models and reviews have tended to be positive.
Why BYD is reserving their most advanced models for their home market is unclear. They may be trying to get more miles out of existing tooling. If their older models are still class-leading in export markets, they can concentrate resources on the latest models for the more competitive Chinese market. Increasing production to match sales growth is also likely a challenge. But expect more advanced PHEVs from BYD and other automakers to be on the way to global markets soon.
In the EU, while elevated tariffs focus on BEV models, PHEVs are not currently being targeted. This could lead Chinese car companies to focus more on PHEV models. While this might pose a competitive challenge to European automakers, many may welcome the new entrants, as they can pool with them to meet CO2 standards and avoid fines.
PHEV markets outside of the US could soon become much more competitive. If China’s recent sales are any indication, PHEV sales tend to take from ICE vehicles, while BEVs continue to grow. As renewables start to drive down electricity prices, being able to run a car on electricity will become more economical. As other automakers step up their PHEV game to compete in global markets, some of those models and the technology within them is also likely to trickle into the US market, even if protectionism blocks Chinese competitors.
Of course, all of this can change. Escalating protectionism can reverse, as it did when FDR replaced Hoover. I do not expect European company car benefits to go away, as it could cripple already declining car sales on the continent, but they could shift to favor electrified vehicles and using electricity. Public transit and urban planning could improve, changing the role that cars play in our lives. In a dynamic world, it is useful to understand what is happening elsewhere, as we could see similar dynamics in the future.
Markets are complicated, and there are undoubtedly other factors also at play. What do you think is driving PHEV sales in China, and what do you think the future holds for the technology?
By Larry Evans
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