Tesla (NASDAQ:TSLA) CEO Elon Musk recently wrapped up his visit to China, sparking speculation about the introduction of the full-self driving (FSD) system in the country. However, this visit comes at a time when China’s auto sector is focusing on hydrogen-powered vehicles with policymakers introducing various incentives and business applications to position China as a global leader in this clean energy source.

What Happened: Both central and local governments in China are rolling out a range of incentives to encourage the use of hydrogen-powered vehicles, South China Morning Post reported recently.

For example, Sichuan province is contemplating the removal of highway tolls for these vehicles and lifting restrictions on their access within the city. The province also plans to construct hydrogen refuelling stations and offer subsidies based on the standards of the charging stations.

Hydrogen, a carbon-neutral energy source, allows quick refuelling, making it an ideal choice for large commercial vehicles. Guotai Junan Securities analyst Pang Junwen pointed out that Sichuan’s initiative could make hydrogen-powered vehicles a cost-effective alternative to diesel-fuelled trucks.

Sinopec, China’s largest oil and gas producer, has constructed 11 hydrogen fuel supply centres and 128 hydrogen refuelling stations. Recognizing hydrogen energy as a new frontier for emerging technologies and industries, China, already a significant producer of electric vehicles and lithium batteries, is keen to explore this avenue further.

Coincidently, China’s EV industry is witnessing a situation of overcapacity, Nikkei Asia reported on Sunday. The industry’s breakeven point usually stands at approximately 80% for factory utilization. However, for new energy vehicles, including EVs, this figure is around 50% in China. This overproduction has already resulted in bankruptcy for several emerging EV makers.

Chinese EV manufacturers can afford to offer lower prices due to the country’s concentrated battery procurement networks. Batteries make up 30% to 40% of EV manufacturing costs, and Chinese battery prices are about 80% of those in Europe and the U.S., as per the International Energy Agency.

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Despite the overcapacity, companies continue to boost production, aiming to increase their share in the world’s largest EV market. China’s production capacity for new energy vehicles is projected to surpass 36 million vehicles in 2025, almost double the anticipated sales of around 17 million vehicles.

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Why It Matters: The automotive industry is undergoing a transformation, driven by the urgent need for sustainable and eco-friendly transportation solutions. While electric vehicles (EVs) dominate the news, there is an emerging promise with hydrogen-electric vehicles (HEVs). Hydrogen offers numerous advantages over traditional fossil fuels. It is an abundant resource produced through a variety of renewable methods, making them a clean and sustainable transportation alternative.

However, not everyone is on board with hydrogen as a renewable energy source. Musk has previously expressed his disagreement with hydrogen as a possible source of renewable energy, terming it "idiotic.” Despite this, China’s push for hydrogen energy signifies a significant shift in the global energy landscape.

Meanwhile, Tesla is reportedly partnering with Beijing-based internet company Baidu in an attempt to introduce its driver assistance features in China. The partnership will focus on providing high-precision, lane-level mapping and navigation data for China.

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This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.