Diesel could shake off its dirty image and help China's autos become more eco-friendly

----By Tim Burroughs

Gone are the days when automobiles in China would crudely fall in one of two categories: plush and pricey models or cheap, unstylish ones that just got you from A to B. New cars by both foreign manufacturers and ambitious local players reflect the functions and fashions of an increasingly diversified market. They are also likely to be greener.

China is working from a very low base when it comes to alternative-fuel cars, but recent auto shows have been notable for the high-profile appearance of hybrid vehicles as well as cars powered by exhaust-free hydrogen fuel cells.

Honda, GM, Ford and BMW all had such vehicles on display at the Shanghai Auto Show in April. Not to be outdone, local manufacturers Shanghai Automobile Industry Corp (SAIC) and Chang'an Automobile brought along experimental fuel-cell sedans and gasoline-electric hybrids. Chery Automobile even showed models that run on vegetable oil, natural gas and ethanol.

"Everyone is talking about green vehicles," says Philippe Coquelle, director of automotive research at market research firm ACNielsen China.

Pariah of pollution

Transport - and the carbon monoxide and nitrogen oxides vehicles produce - is now regarded as the key contributor to rising urban pollution. The push towards alternative fuels is unsurprising considering Beijing's plans to increase energy efficiency and the International Energy Agency's recent warning that China could overtake the US to become the world's largest emitter of greenhouse gases as early as next year.

What may come as a shock to many Chinese people is that diesel, still widely associated with noisy trucks that don't start in winter, could be the answer. Nearly 80 percent of commercial vehicles in China run on diesel but penetration in the passenger car market is just 1.2 percent. In Europe, it is 40-50 percent, according to Citigroup.

Modern-day diesel produces fewer emissions and is 20-30 percent more economical than gasoline.

"Volkswagen is confident that modern, fuel-saving and environmentally friendly diesel passenger cars are one of the best available solutions for China's car industry and consumers," says a spokesperson for the German automaker, which has been selling diesel engines in China since 2002.

Volkswagen plans to reduce fuel consumption and emissions by more than 20 percent by 2010 for all vehicles produced through joint ventures with First Auto Works and SAIC, which together cleared more than 700,000 units in 2006. Contributing to this will be a growing market for diesel engines in passenger cars, of which Volkswagen expects to have a 5-10 percent share by 2010.

But the company admits that it is difficult to make accurate predictions.

First of all, despite the central government announcing several policies favouring energy-saving cars, there are still bans on the sale or use of diesel-powered vehicles in many cities.

Then there is the fuel itself. The economical and comparatively eco-friendly diesel vehicles now found in Europe meet Euro III emissions standards and above and require high-quality diesel to achieve this. Meanwhile, China's State Environmental Protection Administration (SEPA) only brought in Euro III at the start of 2007, and it remains to be seen how effectively it can be enforced.

Even if the right car is united with the right kind of fuel in one town, there is no guarantee it will be the same a few kilometres down the road.

"The diesel quality in China varies from city to city or even from filling station to filling station," says a spokesperson for Volkswagen. "This factor currently limits the wide use of diesel cars in China."

Green progress

However, some industry experts believe that developments in the country's power industry will lead to change. Beijing is keen to promote coal liquefaction as means of turning the country's abundant coal reserves into much-needed fuel and reduce its dependence on imports. Alternative fuels such as methanol and dimethyl ether will be produced by this nascent coal chemical industry as well as gasoline, aviation fuel and diesel.

Shenhua Energy, the nation's largest coal supplier, says last year it had eight coal liquefaction projects in development, three of them scheduled for completion by 2010.

"The coal-to-liquid fuels that will come out of the new coal conversion projects will meet the Euro IV standard," says Jim Brock, a Beijing-based independent energy consultant. "As these fuels come online we will see more diesel cars being launched. The question is: how fast can it happen?"

Price will play a role. A litre of diesel currently costs about 12 percent more than a litre of gasoline. Retail fuel prices are already subsidized in China and it is possible that the government could intervene and reduce the gap. However, it is only worth taking such action if it is matched by efforts to develop the entire supply chain.

"The whole system has to be revamped from the upscale production of diesel down to getting the fuel into the gas stations," says Charles Cheung, head of regional autos at Citigroup.

Bearing in mind the financial and public perception obstacles that lie between diesel and the passenger car market, there is little doubt that this reform requires a firm push from Beijing. If a demand base can be established, the automakers can be relied upon to supply more diesel-powered models.

"Once the infrastructure is in place, we will bring the vehicles," says Joseph Liu, executive director for vehicle sales, service and marketing at GM China.