By continuing to browse this website, you consent to our use of cookies, as well as to our Terms of Use and Privacy Policy which provide additional information about how we process your data. This website uses cookies to enhance your user experience. Please read our Cookies Policy for more information on how we use cookies, as well as instructions on how to disable cookies. You may disable cookies through your internet browser settings, however this may result in some parts of the website not working properly for you.

© CompassList

© CompassList

Eliminating subsidies is a painful must for the sustainability of China’s electric vehicle industry

On June 25, China's central and local governments began another round of subsidy cuts to the electric vehicle industry. Chinese EV maker BYD, which reported a 30% decline in sales and an 89% plunge in net profit in its third quarter, attributed the poor performance to the decrease in governmental funding.

About 151,000 new electric vehicles were purchased in China in June, the high for 2019. Since then, the number of vehicles sold has declined for four consecutive months, falling to a low of 75,000 units in October, a 45.6% drop from October 2018.

In 2009, when annual sales of new energy vehicles (including pure electric cars, plug-in hybrids and hydrogen fuel cell vehicles) was less than 10,000 units, the central and local governments in China began an NEV subsidy program to give a boost to the market. The program involved generous support for Chinese EV makers. In 2013, at the program's peak, whenever manufacturer sold an electric car with a range of 150–250 km, it could apply for up to RMB 50,000 in government subsidies. 

The state funding attracted many new companies, which led to an overcrowded market. As of March 2019, 486 new EV makers were registered in China, a threefold increase in two years. By the end of 2018, the production capacity of new electric vehicles exceeded 20m units, 10 times the government's 2020 sales target of 2m units.

Out with the old

China plans to completely end its NEV subsidies by the end of 2020 and has been gradually reducing them. Before, the subsidies were a boon for EV buyers: In 2018, e.g., EV makers had to price their cars between RMB 40,000–60,000 (US$5,700–8,570), an affordable price range for most middle-class Chinese, if they wanted to maximize how much they received in subsidies.

But as manufacturers sought more government funding, they stuck to churning out low-end EVs, leading to overproduction. In 2018, EVs priced at less than RMB 100,000 (US$14,286) accounted for 43.5% of total sales; vehicles priced between RMB 100,000–150,000 accounted for 25.9%.

Overall, the subsidies helped grow EV sales. In the past decade, RMB 210bn in government funding was disbursed to manufacturers, and annual sales of new EVs increased to over 1m.

© CompassList

In with the new

“It’s unhealthy for an industry to achieve growth by relying on subsides from the government. Instead, we should pursue market-based policies,” explained former Finance Minister Lou Jiwei in 2016. By that point, the Chinese EV market was humming along. The time had come to encourage competition and weed out the weaker companies, which meant phasing out the subsidies.

To increase their market share, manufacturers will now have to improve their products and technology. The new subsidy policy, which will stop all governmental funding by end 2020, has raised the technological bar for EVs that qualify for financial incentives. For example, to qualify for the current subsidies, electric cars must have a range of at least 250 km.

In the past, manufacturers focused on delivering lower-end models to earn higher subsidies. “Given the costs of production, it was hard to make high-quality EVs at [a price of less than RMB 100,000], even with the subsidies,” said He Xiaopeng, CEO of Guangzhou-based EV startup Xpeng Motors. The sacrifice of quality for affordability resulted in many quality complaints from consumers. “Bad word-of-mouth will hurt the long-term growth of the EV industry.”

Previously, EV makers were only eligible for subsidies if they used batteries from 57 domestic suppliers designated by the government. On June 21, China’s Ministry of Industry and Information Technology scrapped the so-called “white list” of recommended suppliers.

The change will open up China’s EV battery market to foreign companies, such as Panasonic, Tesla’s long-term battery supplier. Companies like Panasonic might produce better batteries but, because of the white list, couldn't reach a wider audience in China. “Together with the subsidy cuts, this move has created the perfect opportunity to improve the quality of [Chinese-made] EVs," said Gu Huinan, general manager of GAC New Energy Automobile Co., Ltd.

Responses to the expected change

The government intends to continue supporting the industry in other ways. Rather than subsidizing EV manufacturers directly, the funds will be used to build charging facilities and improve supporting services, according to a document issued by the Ministry of Finance in March. The government anticipates that greater availability of charging piles will help convince the public EVs are a viable alternative to fossil fuel vehicles.

For consumers, the possibility that the subsidy cuts might increase price has had an impact on their willingness to buy. A woman named Wang choose to buy an EV two weeks before the most recent round of government cuts. “I made the decision soon after the changes were announced in March,” she said.

EV makers are in a delicate position. Increasing prices means risking losing market share, while keeping prices unchanged will lead to profit losses. Some manufacturers have opted to modestly upgrade their existing models and launch them with higher price tags as new products, making it easier for customers to accept the cost increase.

Both consumers and manufacturers remain optimistic about the EV market's prospects. “Compared to gasoline cars, electric cars cost less for driving, maintenance and repair. And they are better for the environment,” said Wang.

Li Bin, founder and CEO of NYSE-listed electric car manufacturer NIO, saw the subsidy slashes as a turning point for the EV sector. “It exerted huge pressure on EV sales in a short time,” he said. But, if manufacturers are forced to created better quality products in response to higher consumer demand, “[the sector] will become healthier.”

Sign up for a FREE Basic Account with CompassList to access our select articles and newsletters

Edited by Wendy Lovinger

FEEDBACK / COMMUNITY CONTRIBUTIONS

We pride ourselves on the accuracy of our information and reporting. Please help us by letting us know of any incomplete or inaccurate information on our website.

Gift This Article

The gift link can be opened by one recipient only.

You have 0 gift credits left this month

The discount code you entered is invalid

Please make sure you have entered your discount code correctly. Or try again in a few moments.

Download a free sample profile here to view premium content

This field is mandatory
This field is mandatory
Cancel

Download successful.

Your sample has been sent. Please check your email.