Crackdown on electric-vehicle subsidy cheats expected to favour industry leaders

China’s crackdown on electric-vehicle (EV) subsidy fraud since the start of this year may deter demand short term — but longer term it bodes well for the industry’s growth by knocking out low-quality manufacturers and giving industry leaders the technology edge, analysts say.

The government revealed last week it had punished five auto makers for defrauding a total of 1 billion yuan in subsidies. One of them didn’t even make EVs.

All the offenders were fined and had to return the subsidies, while one had its auto production licenses revoked.

As part of the clampdown, officials are now imposing more stringent technology standards and limiting the number of startups in the EV sector.

However, more action could follow. The Ministry of Finance (MOF) said more than 90 major new energy vehicle (NEV) firms have been investigated within the sweep for possible fraud, and those five companies punished so far are simply the worst cases. The term “new energy” includes pure EVs and plug-in hybrid EVs.

The result, said Deutsche Bank analysts Fei Sun and Vincent Ha in a recent research note, is the crackdown “has deterred NEV demand, in particular for electric buses, and created uncertainty over the subsidy scheme”.

Since the government suspended the subsidy scheme various firms have reported considerable liquidity problems. Some have been dragged even deeper into crisis, after reports of suicide cases following the investigation.

In March, Liu Peng, a manager at an auto dealership in Nanjing in Jiangsu province took his own life, after he had accused Chinese automaker BYD of abusing the subsidy programme by obtaining or withholding money unfairly, Caixin claimed in a report.

However, BYD later denied the charges and said it was Liu’s dealership that didn’t pay it the subsidies it had received from the government.

The same month, Wu Wenwen, general manager of Suzhou Jinlong – one of the five auto makers punished by the government – jumped to death from a building, possibly due to “extreme pressure” related to the subsidy fraud investigation, according to a report by The Paper, a state-backed news website. Suzhou Jinlong denied Wu’s death was related to the probe.

“In the short term, the NEV industry faces pressure (due to the crackdown), and the industrial chain might be affected,” said Zhengwei Li and Wei Feng, analysts for China International Capital Corporation (CICC), one of the country’s leading investment banks, in a recent research report.

For some bus manufacturers, they say, being forced to pay back central government subsidies will have a serious impact on their 2016 earnings, with stricter management of the industry denting sales.

However, longer term, Goldman Sachs now suggests the investigation should end up being positive for the industry as it will raise the quality bar and knock out low-quality auto makers.

NEV industry leaders, it argues, will be given the technology edge over their rivals and improve their quality-assurance capabilities as a result.

“We expect more policies to be announced in the coming months following the probe, which should help clear up any uncertainties around NEV policy trends,” its analysts said in a note, adding the market should resume a healthier growth model too, after the new policies are rolled out, and higher-quality products should gain market share.

Yang Zhiting, an analyst at Bank of Communications Schroder Fund Management, also believes the government’s stricter controls will pave the way for healthier development of the sector.

“China has seen a boom in the electric vehicle market, but that’s been largely built on the government’s generous subsidies,” Yang said. “There are some underlying problems.”

According to official MOF statistics, 220,000 to 250,000 EVs were sold in China last year, making the country the world’s biggest market.

But the driving force behind that is seen as the massive 33.4 billion yuan in direct cash subsidies offered by the end of 2015, to promote the NEVs.

Yang, however, points out that despite the huge injection of government cash, many EV manufacturers have failed to upgrade their technology while producing more cars. Instead, they have flooded the market with low-cost, low-quality products, while continuing to enjoy the price benefits.

One of the starkest failings of the domestic EV industry is improving the performance and safety of the batteries used in vehicles, say experts, in an effort to produce a larger number of EVs last year.

“To some extent, last year’s EV boom is built on a pile of sand,” Yang said.

He thinks the new tightened regulations will raise the entry bar of the industry, too, which bodes well for long-term and more sustainable growth.

Analysts at CICC are in no doubt the leading players will be the biggest winners from the tougher rules.

“As the overhang of subsidy fraud has been removed, the medium/long-term development trend of the industry remains unchanged, which help the bellwethers gain more market share.”