What if China’s e-car subsidies are going to be phased out?

February 09, 2015 12:17
A customer tries the touchscreen console inside Tesla's Model S electric vehicle at a showroom in Beijing. The car created a sensation when it hit the Chinese market last year. Photo: Bloomberg

China’s new-energy car sector is in high gear, but it won't be a smooth ride.

The industry is experiencing a boom thanks mainly to state policy and fiscal support since the middle of last year. But a major challenge is looming. The government is planning to phase out its direct subsidies to car buyers.

According to sources, the Ministry of Finance and three other central government departments will soon release a plan to reduce subsidies to new-energy car buyers by 10 percent in 2017, from the 2016 level, and by another 10 percent in 2019 compared with the 2017 level.

It is not stated in the plan how much subsidy will be given after 2020, but sources said there are strong voices seeking a complete scrapping of these direct purchase subsidies.

To get a better understanding of how the policy change will affect the sector, a look back at the industry’s recent success is a good starting point.

According to the China Association of Automobile Manufacturers, a total of 78,499 new-energy vehicles were produced in 2014, up 3.5 times from a year ago. Sales also jumped more than 300 percent to 74,763 units.

The explosive growth is remarkable when compared with the sluggish performance of traditional vehicles. Last year, production of vehicles that run on fossil fuel stood at more than 23.6 million, representing a growth of only 7.3 percent. More than 23.4 million were sold, up 6.9 percent.

The robust momentum for new-energy cars continued in January this year, with production at 6,599 units, up 500 percent from a year earlier.

The boom in the sector started in April last year, when Tesla’s Model S hit the domestic market and created a sensation among fans of electric cars as well as environmentalists and tech-savvy people.

Although Tesla is priced far above the financial capability of most Chinese car users, it did help in promoting the idea of environment-friendly vehicles.

But what really gave the industry a shot in the arm was a raft of measures rolled out by the central and local governments. Apart from general policy support, two financial incentives prompted many people to rush to buy new-energy cars. One is the exemption of purchase tax, which accounted for about 8 percent of the selling price of a car. The other is direct fiscal subsidy, which in 2014 amounted to 35,000 to 60,000 yuan for new-energy sedan buyers, and 250,000 to 500,000 yuan for electric bus buyers.

On top of the central government subsidies, some local governments, such as Beijing and Shanghai, followed suit by granting the same amount of subsidies to car buyers. This “double subsidy” was the major booster to the new-energy car mania.

The government’s push for new-energy cars came amid growing concerns over air pollution and its ambition to gain leadership in the global new-energy car industry. China appeared to have less chances of excelling in the traditional car sector due to its technological weakness in engines and gear boxes. So it doesn’t want to be left behind as the world is embracing the new-energy car trend.

This explains the government's strong support for the sector. Policymakers want to create a market for car manufacturers to develop their technologies and test their products in the market. But this booming market cannot be sustained if it is mainly built on government fiscal support.

The government’s mindset is to create a startup fund for manufacturers and eventually leave them to fend for themselves in the market. Now that it is thinking of phasing out subsidies, direct subsidies may be totally gone by 2020, while purchase-tax exemption may end by the end of 2017.

It is clear that the time left for new-energy car manufacturers to enjoy government financial support is just five years.

But there are a lot of things that need to be done in those five years for the sector to stand and grow on its own. Those tasks include increasing the electric vehicles’ range, cutting down their costs, making battery convenient and providing good maintenance and repairs.

To complete all these tasks in five years, the new-energy car sector should expect a bumpy road indeed.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.