Fitch predicts rebound in Chinese new energy vehicle sales, despite government reduction in subsidies

New-energy vehicle sales surged more than 18-fold in China from 2013-2015, as generous government subsidies fuelled consumer demand and production

PUBLISHED : Tuesday, 18 July, 2017, 5:33pm
UPDATED : Wednesday, 19 July, 2017, 11:49am

Fitch Ratings expects China’s new-energy vehicle (NEV) sales to rise rapidly, despite the recent reduction in national sales subsidies.

The optimistic prediction comes from continued rising demand in larger cities that have fossil-fuel -driven license plate restrictions, and further cuts in electric vehicle prices.

“Manufacturers expect to offer reduced vehicle prices to partially compensate consumers for the lower subsidies,” said a report written by Fitch Ratings analysts Yang Jing and Jenny Huang.

“There is sufficient headroom for price cuts, given the after-subsidy profitability of certain NEVs – especially e-buses and potential cost savings through economies of scale and battery technology improvement.”

NEV sales numbers surged more than 18-fold in China from 2013 to 2015, as generous government subsidies fuelled consumer demand and production.

However, volume growth fell sharply by 50 per cent year on year in 2016 after a government crackdown on subsidy fraud.

The Chinese authorities then amended its NEV subsidy scheme – which included much lower subsidies (20 per cent lower than 2016) – and tightened technical standards, while still extending the subsidy collection period.

Fitch, however, believes last year’s slower growth to prove a “short-term” reaction to the shift in government policies, and that China’s NEV market will expand steadily to meet its two-million-unit annual sales target by 2020, from around 507,000 in 2016.

That will be underpinned by rising retail demand in tier-1 and large tier-2 cities, many of which still have license-plate restrictions on internal combustion engine vehicles. These cities contributed around 75 per cent of the e-cars sold in 2016.

“Economically developed coastal regions account for the majority of China’s NEV sales due to deeper local government pockets, allowing them to offer subsidies and more developed charging infrastructures,” Yang added.

E-car demand in lower-tier cities should also increase due to tighter regulations on low-speed electric vehicles and greater offerings of cheap, low-end models
Fitch Ratings analysts Yang Jing

“E-car demand in lower-tier cities should also increase due to tighter regulations on low-speed electric vehicles and greater offerings of cheap, low-end models.”

“Manufactures will see NEV sales grow despite higher prices of vehicles even after the subsidies are cut,” agreed Yang Chao, an analyst from Great Wall Securities.

“We expect robust growth for new energy passenger cars in the third quarter.”

However, medium- to long-term market development depends on battery technology advancement and the expansion of charging infrastructure.

“High battery costs, a short driving range and insufficient charging facilities are the major obstacles for NEVs to reach critical mass,” added Huang from Fitch.

“Chinese battery producers still face a large technology gap, too, in battery-pack systems compared with overseas suppliers.”

Intensifying competition remains another challenge, with more foreign carmakers targeting the Chinese market for NEV sales.

“That will increase in the next three years, with model offerings [in China] more-than-doubling from traditional automakers and new entrants,” said Jenny Huang.

“Price competition is also likely after the subsidies were cut in 2017, with profitability not now a near-term priority.”

Last year, the top-10 local manufacturers accounted for more than 96 per cent of e-car sales in China. Shenzhen-based BYD Auto overtook California-based Tesla as the world’s largest e-car maker, by sales in 2015. Nine Chinese electric vehicle (EV) brands ranked among the world’s top-20 manufacturers by volume.

Sino-foreign joint-venture brands have lagged, however, as they are yet to increase locally produced models and imports are not economically competitive due to high tariffs. But many do expect to increase NEV investments in the next five years.

China has the world’s largest NEV market, accounting for 45 per cent of e-cars and almost all e-buses sold worldwide in 2016.

However, global e-car penetration still remains low , accounting for just 2 per cent of total vehicle sales so far in 2017 because retail buyers continue to remain concerned about range limitations and the charging infrastructure in place.