Except perhaps in big cities, a switch to electric vehicles will require lower prices 

 

China's new-energy vehicle market is being driven mainly by policy. According to the central government plan published in 2013, 88 cities are expected to have 335,000 of these vehicles on the road by the end of this year. 

 

Yet, even now, more than half of those cities are not being proactive enough and have no concrete measures to subsidize consumers to make those purchases happen. 

 

The first phase of the pilot project ran from 2010 to 2012 and each of 25 first and second-tier cities was expected to reach a 1,000-vehicle target. But the second phase includes many smaller third and fourth-tier cities among the 88 cities under the year's end mandate. 

 

Incomes in these smaller cities are lower, so consumers may not feel it is easy to afford new-energy cars even with subsidies. More importantly, these cities do not have tight restrictions on car registrations, such as in the metropolises of Beijing, Shanghai and Guangzhou, so there is no incentive for someone to buy a new-energy vehicle just to obtain a car license. 

 

Customers purchase new-energy vehicles based mainly on practical interests and convenience; few will consider only environmental protection. They are attracted mostly by better fuel efficiency, large subsidies, tax reductions and hassle-free car registration. 

 

When the price of a new-energy car is twice that of a traditional vehicle, even after the subsidy, and while the driving range is only 150 to 200 kilometers, consumers will not feel guilty about rejecting "green" vehicles. 

 

Looking at the sales data, we can see that most are sold in large coastal cities. A recent survey by AutoForesight found that more than 60 percent of respondents in smaller, inland cities were "very interested" in new-energy vehicles, compared with less than 50 percent in second-tier cities, and less than 35 percent in first-tier cities. 

 

The results largely come down to the lower passenger vehicle penetration in undeveloped areas, as people there have less experience with owning vehicles so are more easily attracted by new technology. 

 

Suburban customers in small cities have courtyards, so battery charging can be done on their property, and low-speed new-energy vehicles do not need to be registered with police in small cities. 

 

Ironically, consumers in large cities are less interested in new-energy cars, but as they are cornered by car license registration controls, a new-energy vehicle is often the easiest way, if not the only one, to buy a car. 

 

Subsidies, which can amount to tens of thousands of yuan, come as a second temptation. When subsidy policies are completely phased out by the end of 2020, it looks like the most powerful incentives for individuals in large cities would be free car plates and no restrictions on using new energy vehicles. 

 

Therefore, the biggest demand for new-energy vehicles in small cities might come from institutional buyers: New-energy buses, taxis and municipal vehicles such as rubbish trucks. However, these small cities do not have strong motivation to spend so much to buy 5,000 to 10,000 expensive new-energy vehicles. 

 

In the first phase of the pilot project, those 25 cities mostly hit their 1,000-unit target at the end of 2012. This time, the target is much higher, so the bus and taxi fleets in small cities will have to make a greater contribution to these cities' environmental protection campaigns. 

 

The number of city buses in China has been increasing steadily due to urbanization, roughly by 4.4 percent - 20,000 to 25,000 - a year since 2007. By the end of 2013, there were 446,604 on the road. 

 

Total demand for new buses is about 60,000 a year in the foreseeable future, and according to the Ministry of Transport, at least half of these should be new-energy vehicles. 

 

There were just more than 1 million taxis on the road by the end of 2013, with an average annual increase of 1.6 percent. The average annual demand for taxis nationwide over the next few years is expected to be 180,000 to 200,000 units a year. However, in most Chinese cities, taxis belong to individuals rather than state-owned taxi companies. When local governments give orders to taxi drivers to change their cars to new-energy vehicles, the response may be slow. 

 

There are those who say delivery trucks in cities should be the ideal target customers for new-energy trucks. This plan sounds good, but it is nothing but Utopia. Nearly 1 million light trucks are sold in China every year and used for short-distance or urban journeys, but these trucks are owned for the most part by individuals, and the mainstream truck models are low-end products, usually priced at 50,000 yuan to 60,000 yuan ($7,800 to $9,400; 7,100 to 8,500 euros), with even high-end light trucks selling for just 100,000 yuan. 

 

It's unimaginable for those truck owners to replace their current vehicle for some 500,000 yuan new-energy trucks with limited driving range unless the government wants to subsidize 80 percent of the price. 

 

Indeed, we have heard repeatedly about new-energy vehicle sales to fleet customers. However, when we look just a little deeper, the truth is that the sales figures are unimpressive. 

 

Buses and taxis may be the most important fleet buyers now and in the future, but the overall volume is still limited. Individual demand is the only hope for the new-energy vehicle market, and carmakers will have no choice but to lower their prices to a reasonable level.