Beijing's EV battery policy loses touch with reality

SHANGHAI -- In recent years, Beijing has offered big incentives to encourage the sale of electric vehicles, despite scant interest among consumers. 

Now Beijing wants to force-feed the growth of EV battery makers, too. And like previous EV policies, Beijing's proposed battery rules have little basis in reality.

Last week, the Ministry of Industry and Information Technology proposed draft rules for the EV battery industry. 
Suppliers of lithium ion batteries will be required to raise annual production capacity to 8 gigawatt hours, up from the current 200 megawatt hours.
Likewise, producers of nickel-metal hydride batteries must produce at least 1 gigawatt hour annually, up from 10 megawatt hours today.
For the battery industry, this would require a quantum leap in production.
Beijing hopes the draconian policy will force battery makers to consolidate. To be sure, China's battery industry is fragmented. With 227 suppliers of battery cells and 315 producers of battery packs, the market would benefit from consolidation. 
But the new capacity requirement is ludicrously high. In fact, only two manufacturers currently meet the requirement, according to Essence Securities, a securities firm based in Shenzhen.
One is BYD Co., China's largest EV maker. The other is Contemporary Amperex Technology Co., a company in Ningde in east China's Fujian province.
The proposed rule is so tough that some of the world's biggest international battery suppliers ¡ª South Korea's LG Chem and SK Innovation ¡ª are getting the jitters.
According to d1ev.com, a Beijing-based website that covers China's EV industry, neither company comes close to China's production targets.
Each year, LG Chem's factory in Nanjing produces only five gigawatt hours worth of lithium ion batteries, while Samsung's plant in Xi'an can produce only four gigawatt hours.
A third Korean battery producer, SK Innovation, has postponed construction of a plant in China, according to Reuters.
The ministry's proposals offer proof that the government is guided by wishful thinking, rather than by a sober assessment of market conditions. 
The cumulative impact of China's battery mandate and its proposed California-style carbon tax credits seem likely to cause a regulatory trainwreck.
In September, Beijing introduced a carbon credit trading program to goad carmakers to expand EV production.
The plan, due to take effect in 2018, would require automakers with annual production of more than 50,000 vehicles to churn out large numbers of EVs.
Only Volkswagen Group has figured out how to meet the rules. VW has signed up state-owned Chinese automaker Jianghuai Automobile Co. to produce affordable EVs.
The others have yet to recover from the shock. At the Guangzhou auto show last month, Wang Yongqing, president of SAIC-General Motors, told Chinese media that the company would have to build 40,000 EVs a year by 2018.
Wang admitted that SAIC-GM, GM's joint venture with SAIC Motor Corp., would have trouble ramping up EV output in such a short time. And even if it could do so, Wang complained that the partnership would have trouble selling so many EVs.
Rome was not built in a day. Due to high production costs and a scarcity of public charging stations, it will be hard to expect Chinese car buyers to embrace EVs any time soon.