What China's Shifting Subsidies Could Mean For Its Electric Vehicle Industry
The seventh China International Automobile Industry Exhibition held in Meijiang Convention and Exhibition Center in Tianjin on April 28. (Photo by Zhang Peng/LightRocket via Getty Images)
China is the clear global leader in the production and sale of electric vehicles (EVs). Last year, 770,000 EVs were manufactured and sold in the country, a 53%
increase over 2016 and almost four times the number sold in the United States. With EVs still at a cost disadvantage to vehicles made with traditional internal combustion engines (ICE), rapid growth in EVs has been made possible by China’s very generous subsidy policy. To encourage the growth of the industry, China has provided manufacturing incentives to EV companies, as well as subsidies to consumers who purchase EVs.
For example, substantial incentives for the production of electric buses have propelled electric bus sales in China from just over 1,000 in 2011 to a high of 132,000 units in 2016. While electric bus sales in China were slightly lower last year as a result of cuts in the electric bus subsidy program, 99% of the 352,000 electric buses on the road globally are running on China’s streets and roads. There are now over 30 companies making electric buses in China.
Employees work on the assembly line of the electric bus at a BYD's production base on Jan. 23, 2018 in Xi an, Shaanxi Province of China. (Photo by VCG)
In addition to granting incentives to manufacturers of EVs, China has also provided subsidies to consumers who purchase EVs. Depending upon range, China’s Central Government has paid subsidies from RMB 20,000 to RMB 44,000 ($3,000 to $6,600) per vehicle, and most local governments have added between 15% to 50% to that amount. Therefore, total government subsidies on the purchase of an EV with a range of 250 kilometers (150 miles) or greater has been RMB 66,000, or about $10,000.
In addition to consumer subsidies, many cities provide favorable policies such as the assured issuance of a vehicle license and increased access to carpool lanes to EV purchasers. For example, the city of Beijing caps the number of vehicle licenses issued each month in order to regulate the number of vehicles in the capital city. In any given month, as many as three million applications might be received for the 3,000 available new vehicle licenses, with the remainder going into a lottery pool. Buyers of EVs, however, are exempt from this process and assured of receiving a license.
Traffic jams in the Chinese capital on Feb. 17, 2018 in Beijing, China. (Photo by Vincent Isore/IP3/Getty Images)
While China wants cleaner air and has aggressive targets for the adoption of EVs, paying subsidies is an expensive way for the government to achieve its objectives. Although battery costs have declined in recent years, they are still significantly higher than the cost of a vehicle powered by an ICE. Therefore, in order to encourage individuals to buy EVs, either the government has to subsidize their purchases, or automakers have to make EVs available at a price that is competitive with an ICE vehicle.
At an average subsidy of $10,000 per vehicle, China’s central and local governments spent $7.7 billion on EV subsidies in 2017. However, China forecasts that EVs will total 2 million vehicles in 2020, and the government is
targeting 7 million vehicles in 2025. Under the current subsidy program, subsidy payments would rise to approximately $20 billion in 2020 and $70 billion in 2025. In order to put this number into perspective, the annual
budget of the Chinese government was RMB 20.3 trillion ($3.1 trillion) in 2017, and the government ran a fiscal deficit of RMB 3.1 trillion ($460 billion).
Meanwhile, China’s auto market has become one of the most profitable in the world for local and international assemblers alike, and this fact has not been lost on Beijing. Therefore, in September of last year, China’s Ministry of Industry and Information Technology, which oversees the auto industry,
announced a rule change that effectively transfers the burden of subsidizing the development of China’s EV industry from the government to the auto companies.
The price of gasoline and diesel prices have risen to 270 yuan and 260 yuan per ton on July 9, 2018 in China. (Photo by TPG/Getty Images)
Under the new rules, which take effect in 2019, a combination of credits and disincentives are designed to improve the fuel efficiency of traditional-fuel vehicles, as well as to promote the deployment of EVs. The new rules require automakers that sell 30,000 cars or more annually in China to produce fleets with a Corporate Average Fuel Economy of 42 miles per gallon by 2020, and 54.5 mpg by 2025. Original equipment manufacturers (OEMs) that fail to meet the quota will acquire negative credits, which, if allowed to accumulate, must be offset by either buying positive credits from other companies or cutting the production of fuel-burning cars.
In 2019, local and foreign automakers will be required to
earn points equivalent to 10% of the vehicles they produce and import into the country, rising to 12% in 2020. According to Colin McKerracher, a London-based analyst at Bloomberg New Energy Finance, 12% in 2020 would
translate to about 4% to 5% of a company’s actual vehicle sales.
At the same time as it announced the new rules for OEMs, China announced its intention to reduce, and ultimately eliminate, the consumer subsidies for EVs. In order to
encourage the development of EVs with longer ranges and greater battery pack densities, the Central Government’s new policy, which just went into effect in its entirety on June 12:
• Increases subsidies on vehicles with a range per charge of 180 miles;
• Decreases significantly subsidies on EVs with a range from 90 to 180 miles; and
• Eliminates altogether subsidies for cars with a range less than 90 miles.
A General Motors Co. Chevrolet Volt electric vehicle sits parked at a charging station at the General Motors China headquarters in Shanghai, China, on Friday, Sept. 15, 2017. Photographer: Qilai Shen/Bloomberg
As part of the new program, subsidies based on range are further adjusted based on battery pack density. Battery pack densities of over 140 Wh/kg (Watt Hours Per Kilogram) receive up to 20% more subsidy, while battery pack densities below 120 Wh/kg receive 40% less. Vehicles with battery pack densities under 105 Wh/kg now receive no subsidy.
Compared to the old consumer subsidies of approximately $10,000 per vehicle, Central Government subsidies for EVs will range from RMB 15,000 ($2,256) to RMB 60,000 ($9,022) per vehicle going forward, depending upon range and battery density. At this point, it is unclear whether subsidies provided by the local governments will change.
