June 22, 2017

China’s growing electric vehicle market

Foreigners hit speed bumps.

China is expected to reach 7 million new energy domestic vehicle (NEV) sales by 2025, according to Beijing’s 13th Five-Year Plan, finalized in 2015. Chinese NEV sales – the term China uses to refer to battery-electric vehicles, plug-in hybrids and fuel-cell cars – totaled 951,477 units between January 2011 and December 2016. These figures, which include passenger cars and heavy-duty commercial vehicles, have already made the Middle Kingdom the largest electric vehicles (EVs) market in the world, with 37.7% of global sales in 2016.

To address China’s dependence on oil exports and severe air pollution due to an overuse of coal as a main form of electricity production, the government announced in 2010 a trial program to provide monetary incentives for NEV automakers in five cities. The amount of the subsidies stood at 30 billion RMB (USD 4.4 billion) in 2016.

To further boost NEV sales, the government is luring Chinese consumers to adopt electric vehicles by promising charging stations. Beijing plans to install 400,000 charging points in the capital city by 2020. NEV consumers also benefit from central and local governments via cash subsidies, free parking spaces and free license plates.

Sales down in early 2017

After several car makers were fined for defrauding the subsidy program, Beijing enacted a new subsidy policy in August 2016, where only qualified manufacturers are eligible to receive NEV subsidies moving forward. More than a third of Chinese manufacturers, which fail to meet the policy’s qualification standards, are expected to be left out. The Ministry of Industry and Information Technology (MIIT) also recently announced a restriction on the granting of licenses to new electric vehicle (EV) startups, limiting the number to just 10 per year.

Reduced subsidies and new policies caused he stock of EV sales to slump in January 2017, compared to a year earlier. Sales of NEVs dropped 74 percent to 5,682 unites, according to the China Association of Automobile Manufacturers (CAAM).

The downsides of China’s supportive policies are emerging in the form of overcapacity and imperfect competition. More than 200 Chinese NEV manufacturers have thus entered this market to date, producing more than 4,000 licensed NEV models. Another hurdle to a mature market is that low-cost, low quality NEVs dominate. Sixty percent of China’s NEV market share belongs to low-cost cars, whereas less than 20 percent of the market share belongs to high-end ones.

Domestic suppliers in favor

One can only wonder what opportunities foreign eco-friendly carmakers have left in a very protectionist country, where the Chinese automotive brand BYD has been topping the segment sales for several years. Surprisingly, some do exist. Volkswagen recently signed a joint-venture agreement with Chinese manufacturer JAC Motor to mass produce 8 new EVs in China by 2020. Tesla Motors also is in talks to set up a factory in Shanghai.

Opportunities exist in power battery manufacturing as well. This key component of EVs has begun a period of rapid growth and strong demand for lithium-ion batteries. Last year, changes to Chinese legislation allowed foreign firms to set up wholly-owned electric vehicle battery manufacturing plants in free-trade zones in Shanghai, Guangdong, Tianjin and Fujian.

On a less positive note, while China seems to gradually open-up its EV battery market to foreign companies, conditions still favor domestic suppliers. In June 2016, MIIT left some prominent foreign companies off a list of battery manufacturers approved to receive government subsidies, including Samsung and LG, which have been manufacturing batteries in China for many years. Exclusion from the list means that from January 20 18, manufacturers of EVs using batteries made by manufacturers not included on the approved list will not be eligible for government subsidies.

Even if still booming thanks to government subsidies, the future of China’s NEV market remains uncertain and challenging.

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