Cut and Thrust

Areduction in subsidies for new-energy vehicles (NEVs) has been officially confirmed, with some observers predicting that the industry could face chal- lenges following the reduction and ultimate cancellation of favorable policies.

“The reduction of NEV subsidies is im- perative,” said Miao Wei, Minister of Industry and Information Technology, at the China EV100 Forum in Beijing on January 20.

“Compared with postponing the cancellation of subsidies until the end of 2020, it is better to gradually reduce them to lessen the im- mediate impact on companies.”

Wu Zhixin, Vice President of the China Automotive Technology and Research Center, had previously predicted that NEV subsidies would be further reduced this year, and that the models that qualifi ed for subsidies in 2017 would have just four months left to enjoy the benefi ts of the preferential policy.

Necessary action

In 2017, 794,000 NEVs were manufactured in China, accounting for 2.7 percent of the country’s total automobile output, the highest in the world for a third successive year. Of the total NEVs produced, 777,000 were sold.

In its current state, government support for NEVs comes in the form of cash subsi- dies, a preferential license plate policy and exemption from auto purchase tax. Under the subsidy policy, NEV producers sell their vehicles to consumers at the price after the deduction of government subsidies, and the Central Government then reimburses the manufacturers for these deductions.

According to Cui Dongshu, Secretary General of the China Passenger Car Association, at the initial stage of develop- ment, the cost-performance ratio of NEVs is far from able to meet consumer demand, and so the market itself is unable to develop, making it necessary for governments at the central and local levels to offer subsidies. However, in certain aspects continuous cash subsidies have backfired. Subsidies to consumers could only ever be temporary and are not sustainable, said Lin Boqiang, head of the China Institute for Energy Policy Studies at Xiamen University. “Subsidies will increase the volume of sales, but will not nec- essarily improve the quality of the product. The subsidies are also very likely to be exploited in some way,” said Lin.

According to a report by the China News Service, in 2015 the central budget allocated 17.5 billion yuan ($2.76 billion) in advance for NEV subsidies, and in 2013-15 local govern- ments at various levels paid a total of 20 billion yuan ($3.16 billion) to this end. Cui estimates that considering the current speed at which NEVs are growing, the actual cash subsidies to the industry over the past two years may be 83 billion yuan ($13.11 billion) higher than the quantity originally assigned.

“High subsidy standards have encour- a ged NEV producers to blindly expand their production,” said Cui, who suggested that the government raise the technical standards for subsidies in order to encourage NEV producers to improve their technology.

Lin believes that reducing cash subsidies will encourage producers to reduce costs and that the development of electric vehicles must focus on improving quality, reducing costs and increasing the capacity of batteries. In order to find solutions to these issues, it is important for the government to be discerning over the type of subsidies it provides. “For example, the government can use subsidies to encourage the development of batteries and innovation,” he said.

Industry shift

Ultimately the reduction of cash subsidies is inevitable, and so NEV producers will invariably have to suffer for a certain period of time.

Yin Chengliang, a professor at the Institute of Automotive Engineering at Shanghai Jiao Tong University, said the re- duction of cash subsidies will directly affect car models whose sales volume accounts for 70 percent of the market total, which may in turn disrupt the production plans of NEV producers.

Wu believes that the rapid reduction of subsidies will put a lot of pressure on NEV producers, and the industry will consequent- ly have to adapt. In the “post-subsidy era” following the deadline in 2020, the driving force behind the NEV industry will shift from government policy to consumer demand. “This phase will be very short, and in the coming three years NEV producers must re- vise the structure of their businesses. Market competition will mainly focus on innovation, product quality, value-added services and business models,” said Wu.

However, as cash subsidies fade out, new policies are to be put in place.

Miao said to replace cash subsidies, the Ministry of Industry and Information Technology (MIIT) has introduced a grading system for producers according to power consumption and the number of vehicles pro- duced, which aims to establish a new market- oriented subsidy system after the current arrangement is phased out by 2020. The new system is to be implemented as of April 1.

“Under the new system the government sets a maximum limit for power consumption, and if a car producer surpasses this amount it will be punished. Large automakers must also assume a certain proportion of NEV produc- tion,” Lin explained.

According to the MIIT system, the grades are tradable among different car producers so companies that fail to meet the government targets must purchase scores from those that have met the targets.

Miao said the grading system is designed to encourage car producers to reorient their research and development and product strat- egies as early as possible, otherwise losses may be suffered and future development restricted.

China’s policy of supporting NEVs has transitioned from one that is inclusively pref- erential to one that is based on competitive selection, said Liu Bin, chief expert of the China Automotive Technology and Research Center.