China EV subsidies could be extended if the government considers it necessary to stimulate the market, besides tackling slow growth in the auto industry.
China is negotiating with manufacturers about extending costly electric vehicle (EV) subsidies that were originally set to expire in 2022. In the Chinese context, EVs refer to battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs and extended-range electric vehicles included), and fuel cell electric vehicles (FCVs). The goal is to provide support for the industry and expand this critical market.
China’s economy has slowed dramatically in recent months and with it, has its vehicle sales. Since the beginning of 2022, multiple cities and industrial parks across China, including the industrial powerhouse – the Yangtze River Economic Basin – have alternately suspended their production because of COVID-19 prevention and control rules. The pandemic-linked restrictions have resulted in the closure of stores, disruption of supply chains, and reduced consumption expenditure.
Thus, to ramp up consumer interest in China’s EV market, it is reported that various government ministries, such as the Ministry of Information and Industrial Technology (MIIT), are now considering extending incentives to EV customers to 2023. Global and domestic investors have always been paying close attention to the policy changes on EV subsidies, as government incentives are a key driver of growth.
In this article, we examine China’s evolving policy on EV subsidies and how recent economic headwinds influence their trajectory.
China has long been vying to be a global leader in the EV market.
To encourage the adoption of EVs, the Chinese government started to provide generous subsidies for EV purchase in 2009, as EVs were costlier than conventional internal combustion engine (ICE) vehicles. Since then, the central government has spent more than RMB 200 billion on EV subsidies, with local governments supplementing an additional RMB 100 billion – or US$47 billion in total.
In 2014, China announced its plan to extend these subsidies beyond the original 2015 expiration date as part of continued efforts to jump-start plug-in sales and reduce air pollution.
That investment paid off. In 2016, for example, the combined sales of EVs and PHEVs in China increased 62 percent to 336,000 units, making it by far the biggest market for hybrid vehicles worldwide, with a share of 44 percent of global sales. This was an extraordinary outcome, considering that the Chinese market share was only six percent in 2013.
With sales going up, paying for the EV subsidies became extremely costly for the government. Meanwhile, it was found that multiple factories had deceived authorities to become eligible for subsidies.
The frauds occurred through three main “tricks”:
The fraud controversy drew widespread criticism of China’s EV policy, with some questioning whether the subsidies should be continued at all.
To be fair, both in the United States and Europe, fiscal subsidies are a major driver of EV adoption, and the same is true in China. The subsidy fraud, on the other hand, was mostly caused by flaws in policy design and implementation. One important flaw is that the subsidy levels are excessively high and apply to cars of any technical complexity.
For example, a 6-meter-long battery electric bus might have earned up to RMB 0.6 million (US$87,000) in subsidies, half from the national government and half from the local government. This large subsidy surpasses the overall cost of a bus equipped with low-cost technology, giving manufacturers an incentive to deceive the government to earn the subsidy. Another flaw is the absence of effective enforcement mechanisms.
Amid the fraudulent activity, the government released a series of regulatory measures to consolidate the industry and prosecute violators of defrauding the subsidy program. These included raising eligibility standards to qualify as a manufacturer of new energy vehicles (NEVs) in China. Moreover, Beijing revealed a plan to wind down EV subsidies, with 20 percent cuts from 2017 to 2018 and 40 percent cuts from 2019 to 2020. The original idea was to move from direct financial aid to a market-based approach.
Effective from January 1, 2017, the plan featured the following changes:
These legislative changes, which were primarily prompted by the high-profile subsidy fraud case, became significant revisions for China’s EV business and regulations. “A loss turned out to be a gain,” as an old Chinese proverb goes, since the new plan helped boosting more confidence in China’s EV market: by the end of 2017, NEVs sales in China still contributed to almost half of the total sales worldwide.
Driven by government support, EV sales increased to 3.52 million units in 2021. This trend is expected to continue, with China striving to cut carbon emissions in all fields and a growing market for green consumption. According to the China Association of Automobile Manufacturers, EV sales in China will increase by 47 percent to five million by 2022.
China’s plan of phasing out EV subsidies, meanwhile, was interrupted by the unexpected outbreak of the COVID-19 pandemic. On April 23, 2020, China’s MIIT, the Ministry of Finance (MOF), Ministry of Science and Technology (MOST), and National Development and Reform Commission (NDRC) jointly released a Notice on ‘Optimizing Fiscal Subsidies for Promoting New Energy Vehicles’ (hereafter ‘the Notice’). To support the automobile sector during the downturn caused by the pandemic, the Notice introduced four significant measures besides extending EV subsidies to 2022:
China’s NEV market recovered with a 17 percent growth in EV sales in 2020 after a two percent decline in 2019.
The overall design of the latest policy on subsidies resembles past ones – vehicles must meet minimum technical and performance requirements to qualify as recipients of fiscal incentives, and the size of the subsidy is tied to a variety of vehicle specifications and utility parameters.
For example, the minimum electric range requirement for battery electric passenger cars has been changed from 250 to 300 kilometers (km). Thresholds for electric energy consumption have been raised for all types of BEVs, as well as longer-range plug-in hybrid passenger vehicles, with an electric range of at least 80 kilometers. In addition, the 2020 strategy includes a new maximum pre-subsidy car price, comparable to the EV incentive schemes of the United Kingdom, Germany, and a few other top markets. Moreover, vehicles with battery-swapping functions are exempted from the limit on vehicle price, to promote technology and battery swapping as a business model.
The Notice also announced the gradual reduction of subsidies in various public transport categories, including new-energy urban buses, commercial passenger vehicles, taxis, sanitation vehicles, urban logistics vehicles, mail services vehicles, airport shuttle buses, and government automobiles, which were decreased by 10 percent and 20 percent in 2021 and 2022, respectively. This part of the plan was designed to accelerate the electrification of public transportation.
According to the 2020 policy, only passenger EVs costing less than RMB 300,000 (US$42,376) per unit are eligible for the fiscal incentives, along with the above-mentioned conditions for mileage and power efficiency.
Both domestic and foreign enterprises can apply for government subsidies. For example, Tesla announced its intention on April 30, 2020 (on the same day that the policy became official) to cut the pre-subsidy price of its standard-range Model 3 made in China to maintain eligibility for national subsidies. NIO (in Chinese: 蔚来, Wèi lái), a Chinese multinational automobile manufacturer headquartered in Shanghai, has taken advantage of the 400,000 battery swaps performed across China up to 2020 to access the exemption from price limit.
We do not think so. In the long term, China aims to decouple the growth of the EV sector from direct subsidies, making it more self-reliant. This is reflected in the State Council’s NEV Industry Development Plan (2021-2035).
However, in the short term, we do expect some dependency on subsidies as market stability is prioritized and China’s green economy goals are maintained. China Passenger Car Association (CPCA) has forecast that some 5.5 million plug-in EV could be sold in 2022 (6 million units including commercial vehicles). And in Q1 of 2022, EV sales exceeded 1.1 million units, up 130 percent as compared to the same period in 2021.
Moreover, considering that China has vested heavily in building its entire EV supply chain from upstream material, specific auto components, and EV batteries to downstream car design and manufacturing, we have good reason to believe that the government may consider another EV subsidy extension in the near term if there are signs that the phasing out of EV subsidies would seriously dent EV sales.
Relevant stakeholders should pay close attention to China’s market consumption trends.
China’s success in vehicle electrification is largely due to government initiatives that supported EV manufacture and sales at both the national and provincial levels. Because of the government’s support, EV costs have been pushed down to the same level as traditional vehicles, putting China on the path to the mass adoption of such technology.
However, as the Chinese EV industry becomes more established, Beijing has been gradually pulling away incentives for new energy cars. In addition, chip shortages have been affecting manufacturers ever since the beginning of the COVID-19 pandemic, along with several other factors, such as a general decrease in demand and issues in the supply chain. These contingencies, paired with reduced subsidies, will raise the cost of electric vehicles overall – the 30 percent drop in NEV subsidies expected for 2022 could result in a hike in the purchasing price, making consumers reconsider their options.
To offset the potential impact of the decreasing subsidies on EV prices (and thus, risking a loss in sales), local companies like XPeng (in Chinese小鹏汽车, Xiǎopéng Qìchē) and NIO have this far either absorbed the subsidy loss or canceled preferential lending programs for potential purchasers – both strategies that could serve foreign businesses as well in dealing with such changes.
Meanwhile, subsidies are not the only way to stimulate the EV market. The Chinese government has set in place other stimulus measures to boost the market and achieve its objectives.
On April 22, 2020, the Ministry of Finance (MOF), the State Taxation Administration (STA), and the MIIT jointly issued the Announcement about Exempting Vehicle Acquisition Tax for New-Energy Vehicles. The document announced that relevant authorities will exclude NEVs from vehicle purchase tax until the end of 2022. The tax exemption includes PEVs and PHEVs, while FCVs are excluded.
EV businesses can apply for tax exemption by uploading their ‘Motor Vehicle Factory Qualification Certificate’ for approval to the MIIT.
Government officials have suggested that impending economic stimulus measures will prioritize investments in “new infrastructure,” which includes, among other things, NEV charging stations, sustainable energy, and the Internet of Things.
If the government invests in NEV charging stations on a large scale, the sector will be strengthened and NEVs will become more appealing to the ordinary customer. Furthermore, extra incentives for renewable energy, high-tech, and research and development may be available to NEV makers.
EV manufacturing and consumption fit perfectly into China’s economic, industrial, and carbon reduction goals, making the industry an important one for the government.
So far, Beijing has stayed steadfast towards meeting its goal of achieving 20 percent EV deployment by 2025. China is the leading power in worldwide lithium-ion battery manufacture, used in most electric cars. While the bulk of the world’s lithium resources are held by other countries, and China imports 80 percent of its needs, the country has already acquired the majority of lithium mines for future production. It indicates that for China, its future will be electric.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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