Policy support globally for the electric vehicle, or EV, industry has been the dominating driver for uptake, with China’s policies a focal point for market analysis as the country now represents the largest EV market. A review of Chinese policies indicates that the domestic market is in the middle of transitioning from a subsidy dependent sector to a more incentive-led, but self-sustaining market, targeting a 20% EV share of vehicle sales by 2025. This article is the first in a series focused on the global EV market.
China refers to EVs as new-energy vehicles, or NEVs. This category includes pure battery electric vehicles, plug-in hybrids and other non-petrol and non-diesel energy sources, including hydrogen fuel cells.
The Chinese government began subsidizing NEVs in 2009 when central-level subsidies were given to selected public institutions in pilot cities for their NEV purchases. In 2012, the government set out its first NEV industry development plan, which included targets such as NEV production, ownership and vehicle mileage.
The subsidy program has since been widened to include all NEV purchases. The government has also put in place an array of nonfinancial incentives to encourage sales. These include NEV exemptions for both the vehicle purchase tax and the number plate lottery system in a number of cities, and setting the minimum share of NEVs in vehicle procurement by certain public institutions.
As a result, China’s NEV sales took off in 2015, when sales rose by 343% year over year. In 2017, the government started tightening subsidy requirements due to widespread subsidy “scams,” where vehicles (mostly commercial) were claimed to be purchased but were not in actual use; an additional clause was introduced setting the minimum total distance traveled before new NEVs purchased by non-private individuals could become eligible for subsidies.
Shifting away from subsidies
Subsidies have declined in recent years as the government strives to encourage the emergence of a more self-sustaining and competitive industry.
- 1. The NEV Subsidy Program 2019 eliminated all local government subsidies by the end of the transition period on June 25, 2019, except for NEV buses and hydrogen fuel cell vehicles. National-level subsidies will remain in place until the end of 2020.
- 2. NEV purchase tax exemption will continue until at least December 2020. It is not clear whether the tax break will remain from 2021 onwards. Tax exemptions are different from direct cash payments for purchases, and are widely used by governments globally to encourage uptake.
- 3. In June 2019, local governments were asked to review their current policies and to remove all driving and purchase restrictions on NEVs. The official line was soon softened from “all” to “where conditions allow.” Guangzhou, Shenzhen, Guiyang and Hainan have now partly or fully relaxed their vehicle purchase restrictions, but this will be challenging for more populous cities such as Shanghai and Beijing.
In the past, NEV sales generally got stronger as the year progressed. China’s NEV sales fell in the September 2019 quarter as the transition period ended. The China Association of Automobile Manufacturers, or CAAM, forecasts 2019 NEV sales to reach 1.5 million units. Cumulative sales between January and September of 2019 totaled 58% of this target, around similar levels as in 2017 and 2018. It would be unlikely, however, to see a surge in fourth-quarter sales to meet the CAAM forecast in light of the third-quarter performance.
Paving the way for greater competition
The next phase of China’s NEV development plan includes opening up the domestic vehicle and NEV battery manufacturing industry to foreign competition. Restrictions on foreign ownership of vehicle manufacturing entities in China have long been in place, while a preference for NEV batteries made by Chinese companies was introduced to complement the wider subsidy framework.
In 2018, China abolished restrictions on maximum foreign ownership in NEV automakers, previously set at 50%. By 2023, China will remove all restrictions on foreign ownership in the auto sector.
Tesla Inc.‘s Shanghai factory is an example of what non-Chinese automakers could bring to the market. The company’s China website suggests domestic-made Model 3s will be ready for delivery in the first quarter of 2020, pending regulatory approval. The Model 3 is priced at 355,800 yuan, 20% lower than the imported version, although there are differences in specifications. The rollout of the Model 3 will bring more competition to the high-end models in the China market, including the existing X1 PHEV from the BMW Brilliance Automotive Ltd. joint venture, as well as the newly announced FAW-VW’s Audi Q2L e-tron and the BYD Co. Ltd. Han series.
China abolished the whitelist of preferred NEV lithium-ion battery makers in June 2019; prior to this, only EVs equipped with batteries from companies on the list were eligible for subsidies. The whitelist only contained Chinese battery makers, ruling out foreign manufacturers such as LG Chem Ltd., Panasonic Corp. and Samsung SDI Co. Ltd. The existence of the whitelist gave Chinese manufacturers an additional advantage, and its abolition is a step towards the post-subsidy era from 2021.
China is still striving to create internationally leading Chinese auto and battery brands. The removal of restrictions on foreign ownership indicates that China’s policymakers recognize the benefit of international competition, given the domestic auto and battery industries’ current level of development. Chinese manufacturers will be under pressure to meet consumer demand for design and quality at competitive costs, instead of prioritizing meeting subsidy eligibility thresholds.
Longer-term incentives in favor of continued NEV uptake
China’s long-term NEV development goals will shift focus into newer areas, including NEV battery recycling. Recycling is necessary due to the toxicity of lithium-ion battery electrolytes and because the batteries contain high value metals. In 2018, China began developing an NEV battery recycling regulatory framework, required to support a nascent and fragmented recycling industry that will deal with increasing volumes of vehicle batteries expected to reach the end of their lives in the 2020s.
A September 2019 policy announcement asks for greater battery data traceability and a more comprehensive data management system; there is also a whitelist of model recyclers setting industry best practices. The policy sets the minimum lithium content recovery at 85%, around the average of the current possible range. In the future, we expect more detailed and comprehensive policies to further assign recycling responsibilities and to increase recycling rates. Over the long term, recycling prospects will reduce demand for primary metals.
Transition period leading to continued uptake
As the industry shifts from a subsidy driven to more market driven model, against the backdrop of a slowing economy and declining overall auto sales, 2019 and 2020 are two important years for the sector. Headline figures will be impacted by front loading of sales and production before subsidies are phased out. There will likely be industry consolidation as Chinese companies reliant on subsidies see their margins fall, while foreign automakers bring in tougher competition. The Chinese state remains keen, however, to support the NEV sector through a combination of nonfinancial measures.
China is targeting a 20% NEV share of vehicle sales by 2025, compared with the 2018 uptake of 4.5%. If the 20% target is achieved, annual sales could reach 5.7 million units, representing a 4.5-fold increase from 1.3 million units in 2018. Some of China’s policy targets have remained in place since first being announced, such as annual sales and total ownership of 2 million and 5 million vehicles by 2020, although both of these will be difficult to meet. Others have been revised, such as the minimum mileage eligibility threshold for subsidies being reduced from 30,000 kilometers to 20,000 kilometers. Overall, there will be significant upside for all NEV metals if the 2025 uptake target is met.
As of Nov. 8, US$1 was equivalent to 7.00 Chinese yuan.
Read More:China Continues Support For New-Energy Vehicles Despite Subsidy Phaseout