Image credit: Kandi Technologies.

Investors are anticipating a pick-up in China's production and sales of electric vehicles (EVs), taking a cue from a series of new central government policies aimed at reducing carbon emissions and air pollution. Their hopes and expectations were given another boost this past Tuesday, July 13, when the Chinese government announced a "new energy" vehicle mandate requiring at least 30% of new vehicle purchases by local governments and public institutions from 2014-2016 be EVs or other new energy vehicles.

China has vaulted ahead to become the world's largest auto market, as well as the world's largest auto manufacturer, over the past decade. The combination of coal-fired power generation and rapidly rising carbon emissions from vehicles has left Chinese citizens across the country's eastern half subject to a toxic miasma of air pollution, however.

Cleaning the air
Keenly aware of growing public concerns and discontent as well as the health threats posed, China's central government has enacted a series of measures to reduce carbon emissions and air pollution. These include instituting a lottery system that strictly rations new car sales, from which EVs and other "new energy" vehicles, including plug-in hybrid electrics (PHEVs) and fuel cell electric vehicles (FCEVs), are exempt. New energy vehicles are also exempt from a tax on new car purchases.

Adding to the clean, alternative fuel vehicle incentives, government subsidies can cover as much as half the cost of an EV purchase. The Chinese government is also removing heavier polluting older cars from Chinese roads. As many as six million could be taken out of circulation, according to one news report. Government authorities in Beijing also have restricted vehicle access into the city center during rush hours.

Taking another step to follow through on its latest five-year plan target of producing 5 million EVs by 2015, China's national government on July 13 announced that at least 30% of new vehicles purchased by local governments, public institutions and publicly funded organizations must be EVs or other new energy vehicles, according to a Xinhua English news report.

EV and new energy vehicle incentives 
The new energy vehicle mandate initially extends across China's three principal urban and economic centers, which also happen to have the worst air quality: Beijing-Tianjin-Hebei, the Yangtze River Delta, which includes Shanghai; and the Pearl River Delta, which includes the southern Chinese cities and manufacturing centers of Guangzhou and Shenzhen. To support implementation, the Chinese government will subsidize purchases of new energy vehicles with prices under 180,000 yuan (US$29,000).

It has also directed local governments to build out EV charging stations and new energy vehicle fueling infrastructure. According to Xinhua's report, "The ratio of charging interfaces to new energy vehicles should be no less than 1:1. Government organs and public institutions will add new energy vehicle-only parking space. Preferential policies will be introduced in the car plate lottery and auction of new energy vehicles."

The central government's new energy vehicle mandate provides another boost to China's fledgling EV car market, as well as battery and EV charging station manufacturers, which auto industry participants and observers anticipate will quickly become the largest in the world. The problem is there isn't anywhere near enough EVs available, not to mention a glaring lack of supporting infrastructure, i.e. EV fast-charging stations.

China's emerging EV market

Statistic: Production of cars in China from 2004 to June 2014 (in 1,000 units) | Statista
Source: Statista

Domestic EV sales have lagged expectations and are well behind pace if they are to meet the national government's 2015 target. That's due to a variety of factors according to industry observers, including constraining regulations on auto manufacturing and foreign investment and a lack of collaboration between the auto manufacturing and power utility sectors.

As the new energy vehicle mandate indicates, conditions have taken a decided turn for the better since China made reducing air and environmental pollution a national priority, however. That should spur investment in EV manufacturing and infrastructure, as well as boost the fortunes of domestic and foreign EV manufacturers looking to gain a share of China's potentially huge, but as yet nascent, EV market.

Marking Tesla Motors (NASDAQ:TSLA) April entry into China's EV market, CEO Elon Musk personally handed new owners the keys of the first Tesla EVs sold in China. The EV pioneer has opened its first showroom and is building out a network of Supercharger fast-charging EV stations, which enables EVs' lithium ion battery packs to be charged half-full in around 20 minutes as compared to between six and eight hours from a 240-volt outlet.

Based in large part on the central government's recently instituted pro-EV policies, BMW's CEO believes China will become the world's largest EV market by 2020. In April, BMW announced that it is installing 46 public EV charging stations in and around Beijing. In addition, some 1,000 of its i3 EVs are being made available in BMW showrooms alongside its more up-market i8 model.

Besides BMW, both Daimler AG and VW are carrying out plans to enter the Chinese EV market, VW with the Golf Blue e-Motion. Japanese auto manufacturers don't intend to miss out on the opportunity either. The Nissan Leaf and Mitsubishi Motors' i-MiEV are both potential candidates.

Then of course, there are China's homegrown EV manufacturers. Having scooped up the assets of bankrupt U.S. EV start-up Fisker Automotive as well as automotive battery manufacturer A123, Wanxiang Group founder and CEO Lu Guanqiu has stated, "I'll put every cent that Wanxiang earns into making electric vehicles." A key auto parts supplier for both General Motors and Ford, Wanxiang Group earned profits of 7.85 billion yuan (~$1.3 billion) last year.

EV auto manufacturer Geely Automobile's car sharing joint venture with Kandi Technologies Group (NASDAQ:KNDI) is proving successful as well. In addition, Geely in February purchased U.S.-based Emerald Technologies, a start-up producing electric vans and taxis in Missouri and the U.K.

Kandi Technologies has emerged as a favorite among those handicapping entrants in China's EV market. They bid up Kandi shares last month following English language translations of a Chinese report stating that Kandi turned a profit last year and that its production of small EVs reached 1,565 in May. That was compared to the 532 Tesla imported that month, according to the news report.

Finally, there's BYD Auto, China's best-selling automobile brand famously backed by Warren Buffett. BYD has partnered with Daimler AG in a 50:50 joint venture – Shenzhen BYD Daimler New Technology – to manufacture luxury EVs under the Denza brand.

Bottom line
Just as it was for the U.S., auto manufacturing has quickly grown to be a key aspect of a rapidly industrializing China. A new, clean energy wave of change looks poised to sweep across and disrupt what is now the world's largest auto market, as well as its largest polluter. The stakes are high. Chinese and foreign auto manufacturers stand to win big if they can capitalize on Chinese government incentives. The same goes for investors looking to catch a ride.