Renewed policy incentives to keep Chinese EV carmakers afloat

Chinese electric vehicle (EV) producers should continue to benefit from Beijing’s new-energy vehicle push, analysts said, even as the business environment becomes increasingly competitive.

China became the world’s largest EV market last year with 336,000 units sold, a 63 per cent jump from the year before. The boom, started three years ago, was largely thanks to generous government subsidies.

But favourable policies toward electric cars will shift from consumers to manufacturers, as monetary incentives had the unintended consequence of distorting the market, prompting carmakers to falsify sales numbers to obtain subsidies.

Beijing reduced subsidies by 20 per cent this year, and will gradually phase out all subsidies by 2020.

Previously, buyers of the longest-range EVs could receive subsidies up to 110,000 yuan (US$16,703) per unit from central and local governments.

The drop in direct subsidy will be replaced by a dual-credit scheme to be launched in 2019, the central government announced on September 28.

The new scheme will require individual carmakers to produce a minimum number of EVs. Those failing to meet the minimum production targets will have to buy credits from competitors with surplus credits. Vehicles that meet range, or distance, targets will also earn credits.

“The government decided to cut subsidies gradually to allow the industry to stand on its own, as it was heavily reliant on subsidies previously,” said Cao Nanxin, a senior industry analyst at research advisory China Policy, headquartered in Beijing.

EVs are also part of a grander plan by China to burnish the image of “Made in China” and transform itself from a producer of cheap goods into an economy of value-added industries, Cao said.

Beijing has set a target of having five million new-energy vehicles on the road by 2020.

Although sales have dropped in the first half of this year because of the reduction in subsidies, Chinese EV producers are still poised to benefit from favourable policies and larger scale of production in the longer term, analysts said.

Chinese carmakers, which produce the most number of EVs sold in China, will be able to profit from earning and selling credits.

BAIC Group, BYD, Geely and SAIC Motor are the companies most likely to have sizeable credit surpluses to sell to other carmakers in 2019, as EVs account for bigger portions in their manufacturing portfolios, J.P. Morgan analysts Nick Lai and Rebecca Wen wrote in a research report published last month.

Shares of BYD, China’s largest electric carmaker who counts Warren Buffett as a major investor, have soared 65 per cent since September 9, when Xin Guobin, vice-minister of industry and information technology, said the country is working on eventually banning the sale of fossil-fuel cars.

Although Xin did not give details on the timeline, the statement shows China’s determination to push forward the use of EVs, said Raymond Tsang, head of automotive and industrial goods for Greater China at Bain & Company.

Chinese players are also well placed to develop better and cheaper batteries, which is the biggest cost in making EVs.

While battery technology at Chinese companies is already on par with their international counterparts, the cost will fall as production expands, the analysts say.

“If you have a plant producing 500,000 units batteries each year, the cost structure is very different to a smaller plant producing only 200,000 units,” said Macro Hecker, a Deloitte consulting partner.

The cost gap between fossil-fuel vehicles and EVs will narrow as batteries and other components become cheaper to produce over the next few years, which will in turn boost the price attractiveness of EVs to consumers, said Bain’s Tsang.

“China’s battery manufacturers are breaking through the battery market which is currently dominated by Japanese and South Korean producers,” PwC said in a report published in August.

PwC projects the cost of battery will fall by 40 per cent by 2020, driven by a combination of improved economy of scale, lower raw material costs and technological advancements.

More players are eyeing the exponential growth potential in China’s EV market, with the dual-credit scheme prompting a surge in joint ventures between local EV producers and global automotive giants, such as Renault-Nissan and Volkswagen.

The trend of joint-ventures will in effect create more competition, as foreign carmakers will seek to penetrate China’s low-end market, until now dominated by domestic manufacturers. At the same time, domestic carmakers will seek to tap the high end of the auto market, until now the domain of the foreign companies, according to Bain’s Tsang.

In addition to the expected increase in competition, more consolidations are likely in the next few years, as the market is already saturated with an excess number of carmakers and models, Deloitte’s Hecker said.

The new incentive scheme also underscores Beijing’s intention to promote the formation of a small number of large-scale manufacturers who will be “globally relevant”, Hecker said.