China excerpts from "Insane Mode: How Elon Musk’s Tesla Sparked an Electric Revolution to End the Age of Oil"

Hi everyone, this is another in the irregular series of book excerpts for Sinocism readers.

Insane Mode: How Elon Musk's Tesla Sparked an Electric Revolution to End the Age of Oil is by Hamish McKenzie, a New Zealander in San Francisco who has worked as a journalist and in communications for Tesla.

In the interest of full disclosure, Hamish is an old friend of Sinocism, having done a profile of me (Bill Bishop: The Invisible China Hand) for Pando Daily back in 2012. He is also a cofounder and senior executive of Substack, the platform that powers this newsletter and in which I am an investor.

But those are not the reasons I am excerpting some of the parts about China and the development of electronic vehicles in the country. Hamish’s work gives some interesting and useful context to the booming EV industry in China.

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On to the excerpt from Insane Mode: How Elon Musk’s Tesla Sparked an Electric Revolution to End the Age of Oil:

“Build Your Dreams”

You never have to look far to find scenes of change in China, but the sense of dynamism is perhaps nowhere more profound than in the border city of Shenzhen. In the 1970s, Shenzhen was an unremarkable fishing village at the end of the Kowloon-Canton rail route. Since President Deng Xiaoping established it as a Special Economic Zone in 1980 as part of the opening up of China’s economy, it has been on a mercantile tear, its population exploding to twelve million people. Today, Shenzhen is a booming metropolis, overflowing with energy and optimism. It is a beacon for young people who want to get ahead in business or score a job at one of the city’s tech companies, like electronics manufacturer Huawei, Internet giant Tencent, or the iPhone-producing Foxconn. Migrants from other parts of China make up more than 80 percent of the city’s population.

Shenzhen stretches its arms thirty-five miles wide as it hugs Hong Kong’s New Territories. To drive from one side to the other is to pass bright new skyscrapers, shopping malls, convention centers, entertainment venues, and sports arenas of geometric radicalism, each competing to attain new levels of gobsmackery, preening under the weight of reflective domes, fine latticework, structural cowlicks, honeycombs, razor edges, suspended ledges... It’s not a mere excitement of the architectural senses—it’s a raging orgy.

The city interior is mostly gray, a dirty clamor of buildings, roads, and sky, occasionally offset by verdant greens that grow rampantly in the subtropical climate and feast on carbon dioxide. The air is gritty with particulates, and one’s breath seems to come out in clods. The streets confront pedestrians with a conflict of the senses: beef broths bubbling in sidewalk stalls; a faint chemical whiff, like new-tire smell, emanating from nearby factories; an undertone of sewage. Buckets in underpasses catch leaks just downstairs from bus shelters that advertise the Apple Watch. Car horns are leaned on without relent. Chinese pop music blares from open-doored shops. Busy people in their twenties, with tight jeans and pretty summer dresses, rush from somewhere to somewhere. It is impossible to imagine the sleepy fishing village that this place once was, and it is unlikely anyone bothers to try. Everyone in Shenzhen looks forward.

“Build Your Dreams.” There could be no more apt promise for this city in this epoch, but the slogan happens to be under the ownership of BYD Auto, one of the world’s largest sellers of electric cars (the largest, if you count hybrids). BYD’s auto division has been based in Shenzhen since 2003, when its parent, BYD Company, acquired a failing local manufacturer called Tsinchuan Automobile Company. Its first car, a gasoline sedan called the F3 that retailed for about $10,000, rolled off the production line in 2005.

To get to BYD Auto’s headquarters, you have to drive twenty-five miles east from the center of Shenzhen to the industrial suburb of Pingshan, past a dribble of drab manufacturing buildings, bleak apartment complexes with laundry hanging outside the windows, and men selling car seat covers from the side of the highway. En route to my destination, my taxi passed a crane that had dropped a shipping container. Cardboard boxes carrying bottles of motor oil had spilled onto the road.

BYD Auto’s campus sits behind an arch of steel pipes and aluminum roofing at its entrance, a faded attempt at industrial grandeur. The sides of the soccer-field-size hexagon that serves as BYD Auto’s global headquarters are painted the same sky blue as the shirts that every worker has to wear. My guide for the day, a young woman on the marketing team, was proud to be at BYD, a rare Chinese company that can claim a global presence. Outside of China, it has offices and factories in the United States, Canada, Japan, Korea, India, Mexico, and Europe. Overall, the company brought in about $11 billion in revenue in 2015.

Wang Chuanfu, an engineer and chemist, cofounded BYD in 1995 at the age of twenty-nine with $300,000 in start-up capital he had raised from relatives. The company earned its early fortune by making rechargeable batteries for mobile phones and counted Motorola, Nokia, Sony Ericsson, and Samsung among its clients. After listing on the Hong Kong Stock Exchange and then acquiring Tsinchuan, Wang plotted a course for BYD to become a leading producer of electric cars and solar power systems—a move that would eventually lead to Warren Buffett, through a Berkshire Hathaway subsidiary, buying 10 percent of the company for $230 million. Buffett’s investment partner Charlie Munger had told the “Oracle of Omaha” that CEO Wang was like a mix between Thomas Edison and Jack Welch—“something like Edison in solving technical problems, and something like Welch in getting done what he needs to do.”

As we walked around the hexagon—a Tetris-era predecessor to Apple’s “spaceship” headquarters—my guide told me that she loved living in Shenzhen. The weather’s good, and, for a major city, it is accommodating of newcomers, she said. In Beijing and Shanghai, the local governments’ anti-speculation policies made it difficult for nonresidents to buy property, but in Shenzhen, it was easy to fulfill their dream of home ownership. The city, after all, is nothing but outsiders—just as eight in ten people are migrants, so are eight in ten home buyers.

BYD’s dream is for a zero-emissions world. We completed our circuit of the building—strolling past packed parking lots of BYD cars and dozens of the Denza model, an electric crossover utility vehicle that was a product of the company’s joint venture with Daimler—and stepped inside the hexagon. The interior had the feel of a semi-abandoned hospital, with faux marble floors and an almost total lack of natural light.

After a brief tour of BYD’s greatest hits in a museum-like showroom for electronics and battery products, my guide led me to a diorama that exhibited the company’s vision. Implanted in a desert in the miniature landscape were solar panels and windmills that fed imaginary power to a battery base station on the edge of a green, populated area. A few electric trucks roamed the miniature streets, while a car sat parked in the garage on the ground floor of a luxury house. Electric vehicle charging stations were dotted around like gas stations.

BYD has a mixed approach to electric transport. For private cars, it’s not betting on full electrification in the short term. Instead, for the next few years, its SUVs and sedans will mostly be hybrids. The company’s belief is that China’s charging infrastructure isn’t yet ready to support electric cars for most people’s living situations. In China’s cities—home to 55 percent of the country’s population—few people live in standalone houses with their own parking spaces, and most live in high-rises with shared parking lots, or none at all. Plugging in is a problem.

By selling “dual mode” plug-in hybrids, which carry both a battery and a gas tank, BYD still qualifies for government subsidies, which can take as much as $8,000 off the sticker price and, crucially, exempt owners from a license plate lottery that would otherwise complicate their efforts to get on the road. In an attempt to mitigate pollution and control the number of cars that pour onto their roads, local governments in major cities have placed strict limits on who can get a license plate. A new car owner’s chances of having their name drawn in the monthly lottery are extremely low. In Beijing in January 2016, for example, the success rate for obtaining a license for a conventional car was 0.15 percent. Those who do get lucky have been known to pay $14,000 at license auctions, a cost that in some cases exceeds the price of the car. To encourage the adoption of new-energy vehicles, however, the governments have waived the license plate lottery system for owners of electric or hybrid vehicles. Unfortunately, what often happens, as Shaun Rein, head of the Shanghai-based China Market Research Group, told me, is that people buy a BYD hybrid so they can get a license plate, but seldom bother to plug it in. Instead, they just rely on gasoline to charge the battery.

BYD is focusing its full-electric efforts on taxis and buses, which, according to the company, account for 20 percent of all vehicle fuel consumption in China. BYD’s electric buses are already in operation in downtown Shenzhen and in several US states, including Washington and California. It has electric taxis on the road in Chile, Uruguay, Hong Kong, the UK, and the Netherlands. The company also produces electric forklifts, sanitation trucks, mining trucks, and concrete mixer trucks, which it sells to emissions-conscious businesses and agencies around the world. The California Air Resources Board, for instance, offers grants for companies to make their industrial fleets zero-emission, as part of its California Climate Investments Program. In June 2016, San Bernardino County, one of the state’s most polluted air basins, was awarded a grant of $9.1 million to purchase twenty-seven electric trucks made by BYD. The company makes the heavy-duty vehicles for the US market in a factory in Lancaster, California.

While my guide said she liked the company’s cars, others I spoke to weren’t so sure. A young Beijinger who worked for one of the electric vehicle start-ups that hoped to surpass BYD felt its cars were “cheap but ugly,” with outdated functions “not suitable of the needs of young people in the city.”

Indeed, BYD’s cars are the opposite of sexy. Their exteriors are blocky and their interiors feel plasticky. The company’s image is about as staid as the uniform shirts that it forces its employees to wear—and it seems to know. In April 2016, a BYD executive, looking enviously at Tesla, said BYD had made branding its top priority for the next two to three years. “We don’t have the ability now to sell tens of thousands of cars before producing a single one,” Senior Vice President Stella Li told Bloomberg, referring to the Tesla Model 3, which attracted hundreds of thousands of preorders more than a year out from the first deliveries. “The day we can do that will be the day our brand is established.” BYD hired a brand consulting firm and made a significant change for a sales event ahead of the 2016 Beijing Auto Show. For his keynote speech, CEO Wang roamed the stage and stressed the company’s mission to clean up the air and make roads safer. He was almost like Elon Musk. The year before, Wang read his speech from behind a lectern.

While BYD attempts to buy market appeal, however, a new generation of Chinese electric car companies are hoping to earn it from the get-go by borrowing some Silicon Valley sizzle.

***

On a sunny day in May 2016, I walked with Li Xiang up a dusty concrete alley in an industrial district in the northeast of Beijing. There wasn’t much in the area except a few car repair shops and the research center for Che He Jia, one of China’s most intriguing new auto start-ups. Li, who was also a founding investor in Nio, started the company in 2015 as a thirty-four-year-old and, by the time I met him, had raised $300 million in start-up capital from his founding team, venture investors, and the LEO Group, which specializes in water supply, power station construction, and petrochemical engineering, among other things.

Che He Jia was renting office space in a building in front of one of the car repair shops, so we walked past open garages and crumpled Volkswagens as we headed to the back section. Li walked with a light step in Nike running shoes and blue jeans. As we approached a door in the side of a concrete slab of a building, he waved his hands. “No photos.” He opened the door and we stepped inside. The first thing I saw was a Renault Twizy, a buggy-like two-seater with a one- speed transmission and a seventeen-horsepower electric motor. Beside it was an electric moped. I figured they were being used as benchmarks.

I turned to my left and saw three clay models, built to scale, of dinky-looking cars with steep windshields and straight backs. The cars, identical except for minor design variations, were each 3.3 feet wide and 8.2 feet long, with room enough for two people, one seated behind the other. They were painted black and silver, so they looked like mechanical snails from a Daft Punk music video. Their squarish noses added a dash of tough-guy attitude to a dainty physique. This was never intended to be a muscle car, though. Che He Jia calls it a “smart electric vehicle” (SEV) and it’s designed purely for city driving, so it has a top speed of forty miles an hour and up to fifty miles of range. It’s small enough that four can be (autonomously) parked side by side in a regular parking spot. The company planned to start selling it at the end of 2017.

Che He Jia is one of a rash of new auto start-ups in China, and Li, founder of the publicly listed automotive site Autohome, is one of several Chinese Internet entrepreneurs intent on creating a car company for the twenty-first century. Li and company have been encouraged by the early success of Tesla in the United States, emboldened by government incentives for clean transport, and convinced that the convergence of electric power trains, connectivity, and autonomous-driving technology has created a once-in-a-century opening for newcomers to enter the market.

As well as Nio and Byton, the list of car start-ups funded by Chinese Internet companies also includes Xiaopeng, whose investors include Alibaba, Foxconn, and Russian billionaire Yuri Milner; Sokon, which acquired Martin Eberhard’s battery start-up Inevit and named him chief innovation officer at its US subsidiary, SF Motors; WM Motor, started by a former executive at Volvo’s Chinese parent company, Geely; Singulato Motors, started by a former Qihoo 360 executive; and a joint effort between Alibaba and the state-owned Shanghai Automotive Industry Corporation (SAIC). Established car companies such as CH-Auto and Changan Automobile are also making electric vehicles. Going by the current birth rate, it’s likely that a dozen more electric car companies will have materialized by the time anyone reads these words. In fact, a 2016 study by the China Automotive Technology and Research Center found that the country had more than two hundred manufacturers of new-energy vehicles. Many lagged behind global standards for quality, reliability, and technology. The government has considered imposing strict limits in an effort to improve standards, with one Chinese Communist Party–linked newspaper suggesting that such a move could wipe out 90 percent of the hopeful start-ups.

The central government plays an outsize role in China, where mandates, incentives, and limits are frequently dished out in five-year plans, policy documents, and statements to the press. A company cannot hope to succeed without at least the government’s tacit consent— companies are dependent on government-issued operating licenses and other allowances—and it helps to have cordial relationships with the regulators (the Chinese call this guanxi). On a macro level, the government controls interest rates, the exchange rate, and the price of energy, among other key levers of the economy. It also has control of major sectors it considers strategic, through state-run oligopolies in banking, energy, and telecommunications, to pick a few.

Electric vehicles fall into a sweet spot of strategic importance (energy) and an industry (auto) already replete with state-owned enterprises, such as BAIC and SAIC. The global ascendance of electric vehicles has also come at a time when the Chinese government is approaching crisis mode over concerns about air quality. The pollution in Beijing is so bad that breathing the air does as much damage to your lungs as smoking two packs of cigarettes a day. Pollution protests have been mounting. At the same time, the government has been attempting to wean the country’s economy off its reliance on natural resources—coal, steel, and iron in particular—to instead emphasize innovation. The 2011 Chinese National Patent Development Strategy highlighted seven industries to focus on in the coming decade: bio- technology, high-end equipment manufacturing, broadband infrastructure, high-end semiconductors, energy conservation, alternative energy, and clean-energy vehicles. In 2017, it added artificial intelligence to the list.

New-energy vehicles have been the subject of special attention. In its most recent five-year plan, the government set a goal of having five million new-energy cars on the road by 2020. Accordingly, it promised financial rewards to companies that surpass targets for such things as electric car sales and battery capacity, and it’s investing in charging infrastructure while encouraging local governments to offer subsidies to reduce charging fees. It has ordered all government departments to own new-energy vehicles made in China; and it has offered financial incentives to encourage investment in car rentals, battery recycling, and charging infrastructure operations, among other areas. Looking further ahead, government officials have also expressed support for autonomous driving. China is aiming for half of the vehicles on the road to be equipped with advanced safety software by 2020, 20 percent to be highly autonomous by 2025, and 10 percent to be fully self-driving by 2030. It will set a deadline after which automakers must stop selling gasoline cars.

Back in Che He Jia’s workshop, Li turned around and walked me over to the SEV’s “buck,” a polystyrene shell wrapped around a mock-up of the vehicle’s interior. I slid into the seat and felt like I was sitting in an arcade-game version of a race car. The steering wheel was a rounded rectangle. There was a touch screen on top of the dashboard, protruding a little into the windshield view. The screen displayed a picture of Taylor Swift, as if an app were playing one of her albums. There were air-conditioning vents, automatic door locks, and a series of controls on the wheel for playing music. I pumped the pedals, imagining I was weaving in and out of Beijing’s clogged beltway traffic. It would not be comfortable to be struck by another vehicle—or even an errant watermelon—in this car, but it’s unlikely you’d be traveling at high enough speeds to suffer serious injury.

The SEV would be marketed to young consumers in China’s major cities—Beijing, Shanghai, Shenzhen, Guangzhou—and was set to retail for about $7,000. As much as it would be a first car for many buyers, it was also like a high-tech upgrade of the electric bikes that Chinese urbanites have been driving for the last couple of decades. Li wanted to supplant the electric bike by providing a low-cost option for people to own a car. “We don’t want to challenge Tesla or any other giant automaker,” Li wrote on the microblogging site Sina Weibo for his 600,00 followers in October 2015. “We just want to make compact, attractive, and affordable smart cars for everybody.”

Li is a multimillionaire high school dropout who grew up under the care of his grandmother in the northern city of Shijiazhuang, in Hebei province. He has always been into technology and an early adopter. As a teenager in the 1990s, he wrote gadget reviews for tech websites and then, as an eighteen-year-old, started his own, PCpop.com. The venture was a success, becoming one of the most well- known electronics review sites in the country and earning millions of dollars in annual revenue. But Li had greater ambitions. At twenty-three years old, he spun off PCpop’s auto vertical to create the car information portal Autohome. Autohome started as a simple reviews site like Edmunds.com but evolved into a comprehensive online marketplace that carried independent news and reviews while linking dealers and manufacturers with a trove of consumer data. Autohome quickly became one of China’s most trusted sources of automotive information and grew into a highly profitable business. In December 2013, it listed on the New York Stock Exchange for an initial public offering that raised $133 million and valued the company at $3.2 billion, making Li rich. He now lives in a wealthy area called Shunyi, outside Beijing, amid elegant villas and an abundance of Teslas.

Li, in fact, was one of the first nine people in China to own a Tesla Model S. In front of a crowd of reporters and fans numbering in the dozens at a launch event outside Tesla’s Beijing office in April 2014, Elon Musk, dressed in a suit and accompanied by his then wife Talulah Riley, handed Li a Model S key. Interviewed by a TV station after the ceremony, a smiling Li mixed praise with skepticism about his new purchase.

“Its external design is that of a million-dollar car. Its driving experience is that of a car costing more than $200,000. But its back seat is that of a $15,000 to $20,000 car.” Li later wrote a more damning review of the Model S, praising its smooth driving experience and acceleration but criticizing its leaky sunroof, wipers that made his windshield dirty, “nightmare” rear seats that were too hard, and a substandard interior, which he compared to a Honda Accord’s. “There are no cupholders!” he would later joke to me, echoing a major concern of early Tesla owners in the United States. (Tesla now offers cupholder solutions for all its vehicles.)

Like Musk, Li is a hands-on chief executive. At Autohome, he test-drove and reviewed many vehicles himself. His public relations employees at Che He Jia were at pains to stress to me that he has granular knowledge of every aspect of his businesses, and indeed he didn’t hesitate to answer each question in careful detail. He is a tycoon in the Silicon Valley mold—geek first, businessman later—and much admired by China’s millennials, who see in Li a self-made success willing to turn his back on the country’s restrictive education system to pursue his dreams. Unlike many other prominent business figures in China, Li dresses casually and cuts a humble figure, eschewing the self-promoting tactics of, say, Jia Yueting or Zhou Hongyi, the controversial cofounder of Internet security company Qihoo 360.

Li’s company prides itself on an Amazon-like understanding of its customers. “We think, ‘What does the real Chinese customer need?’” Li said. The electric vehicles the world had seen to date had not been built with the average Chinese consumer in mind, he noted. Tesla’s cars were products of California, where there were large highways and long commutes, and people lived in houses with garages that they could charge in. BMW’s compact i3, on the other hand, was a product of Europe, where there were condensed urban layouts and short distances between cities, so ninety miles of range was enough to serve most driving needs. In China, by contrast, people were geographically dispersed among hundreds of far-apart but heavily populated cities. China has forty-one cities with more than two million people; more than a dozen cities with a population of more than five million; and five megacities with populations exceeding ten million. Che He Jia’s SEV plan made sense for driving within these cities, but the company needed to come up with something else for driving outside them.

Back in the workshop, after I slid out of the buck, Li walked over to a pair of pinboards near the door. He smiled as he showed me sketches of Che He Jia’s second vehicle, a long-range SUV planned for release in 2018. It looked pretty badass. It was muscular, with the bulldog nose that was on the SEV, but also speedy-looking, with sharp ridgelines that gave the machine some handsome chops. The side panels came up high to meet squinting windows, and the battery pack sat flat below the floor pan. It was designed for families and luggage, with room to seat five people and an extra storage area in the front trunk. It would be built to withstand a high-speed impact, so people could feel safe driving it long distances on highways.

The SUV won’t be purely electric. It will carry a gasoline range extender to allow it to drive 370 miles on a single charge—a concession to China’s lack of charging infrastructure. By contrast, the SEV will carry a twenty-two-pound battery pack that can be removed by hand and plugged into a normal power outlet so it can be charged under a desk at the office or at home overnight—a practice familiar to almost every one of the approximately 200 million electric-bike riders in China. The battery pack’s lithium-ion cells come from Panasonic, which also supplies Tesla. It takes six hours to charge the SEV’s battery fully, Li said, but it can accrue twelve miles of range in half an hour—enough to serve in a pinch.

But maybe people won’t have to drive at all. That’s the other thing that convinced Li that 2015 was the right time to get into the auto industry. He and his cohorts are convinced that the self-driving car era is imminent. “Autonomy may come even earlier than electric,” Li posited. “There’s a faster revolution in autonomous driving software than there is in battery technology.” Che He Jia was building its cars from the start to be ready for the autonomous era.

Excerpted from “Elon Musk's Tesla Sparked an Electric Revolution to End the Age of Oil” by Hamish McKenzie