Can China's EV market thrive without subsidies?

China is still providing support for electric vehicles, but the policies are shifting from carrot to stick, writes Gao Baiyu for China Dialogue

The electric vehicle (EV) sector in China, as elsewhere, has benefitted from government support in its early phase as an up-and-coming green industry. The government has been subsidising producers of EVs for public transport, taxis and the consumer market since 2009. Moreover, EV consumers in China have received purchase subsidies from the government for a number of years.

More than 200 billion RMB (US$28 billion) was spent on EV subsidies and tax breaks in China over the 2009-2022 period. In 2022, the country sold more than 6 million EVs, accounting for half of all sales globally.

As the market has matured, government support and subsidies have declined. Purchase subsidies for EV consumers were phased out at the end of 2022. And, according to information gleaned by China Dialogue from an internal industry meeting, it is likely that other subsidies for EV producers, such as tax breaks, will also be phased out.

Can China maintain its frenetic pace of transport electrification as subsidies disappear? And will the rate of carbon reduction in the sector be affected?

Subsidies have accelerated transport towards carbon peaking

As of the end of 2022, carbon emissions from transport accounted for about 10% of China’s total carbon emissions, making it the third largest source after the power sector and manufacturing. The major share of those transport emissions came from road traffic. Electrification has a significant part to play in reducing road transport emissions and enabling peak carbon to come as soon as possible.

China needs to meet domestic demand for new cars with EVs, making sure they capture the new market, while also accelerating the EV substitution of conventional combustion vehicles on the existing market. To this end, a comprehensive set of financial support policies have been rolled out.

At a national level, China uses exemptions on consumption tax to help lower production costs for EVs and fuel cell vehicles. (In China, consumption tax is payable by producers of luxury and environmentally unfriendly goods, including cigarettes and cars). At the same time, consumers have been spurred with purchase subsidies and relief from vehicle purchase tax. China also exempts car owners from vehicle and vessel tax, while providing infrastructural support to optimise conditions for EV usage.

Meanwhile, regional administrations can offer localised subsidies and other incentives to businesses and consumers, complementing central government support and making EV ownership even more attractive. The municipal government in Chengdu, for example, which wants 800,000 EVs on the road by 2025, awards up to 50 million RMB (￡5.5 million) to any carmaker that develops and brings a new EV model to market, and also gives individual consumers 8,000 RMB (￡890) for acquiring an EV.

How are subsidies being phased out?

The EV industry and market have grown rapidly in China, with policy backing, and for eight years now the country has ranked number one in the world for both production and sales. EV ownership in China at the end of 2022 reached 13.1 million units, accounting for more than half of the global total.

As the market has developed, there has been a winding down of incentives.

One of the best-known was the vehicle-purchase subsidy for EVs, particularly for private buyers. Funded by the state, the policy gave consumers a 4,800 RMB (￡530) discount on the cost of a PHEV and a maximum 12,600 RMB (￡1,400) on a BEV, enabling them to afford EVs that met the policy criteria.

In 2015, the Ministry of Finance announced that subsidies for models other than fuel-cell vehicles would be reduced year by year, and in 2019 the end was declared on subsidies for BEV passenger vehicles with a range of less than 250km. A further announcement in 2020 specified another reduction, and the subsidy was fully withdrawn at the end of 2022, after 13 years.

Support in the form of purchase-tax exemptions has also tailed off, having been extended three times since launching on 1 September 2014. Under the terms of the most recent of those extensions, the tax-free allowance for an electric passenger car purchased between 1 January 2024 and 31 December 2025 is a maximum of 30,000 RMB (￡3,320). For a vehicle bought between 1 January 2026 and 31 December 2027, purchase tax will be levied at 50%, with a maximum allowance of 15,000 RMB (￡1,660).

The withdrawal of vehicle-purchase subsidies and phasing out of purchase-tax incentives raises costs for buyers, which could result in higher prices for EVs coming onto the market, deterring consumers.

In fact, some car companies were facing losses even before subsidies were withdrawn. Corporate earnings reports show that most Chinese EV brands have failed to achieve profitability, having relied on the major technology companies and traditional auto manufacturing to establish themselves. Among Chinese carmakers solely selling EVs into the domestic market, BYD is the only one making an annual profit.

Investment in R&D and fixed assets is the main reason for car company losses. As one report points out, EVs require much higher technology R&D investment than conventional vehicles. At a scale of 400,000 vehicles, for example, EV makers invest more than twice as much as producers of conventional cars. Fluctuating prices for battery materials, the rising price of traction batteries and the tight supply of chips also add to the pressure on EV makers.

What determines the phasing out of subsidies?

EV firms may not be profitable as yet, but this is not the key criterion for deciding on the timing for phasing out incentives. A recent article by the lead specialist at China Automotive Technology & Research Center (CATARC), Liu Bin, lists eight key factors affecting the timing for withdrawing vehicle-purchase tax incentives: the scale of the EV market as a share of new car sales; the reaching of price parity between EVs and conventional vehicles; the degree of consumer acceptance; the industry’s stage of development; the government’s financial situation; requirements for environmental protection; the withdrawal of support policies abroad; and the need for domestic economic stimulus.

According to data from the Ministry of Commerce, the share of EVs as a fraction of new car sales increased from one-eighth in 2021 to one-quarter in 2022. Addressing the 2022-2023 annual conference of the China Clean Transportation Partnership (CCTP), Liu Bin said: “It is generally forecast to be over 30% this year and around 40% in 2025. Looked at this way, the gradual withdrawal of vehicle-purchase-tax incentives should be considered without delay.”

In terms of full life-cycle cost of ownership, the gap between EVs and conventional vehicles is shrinking. A report from the International Council on Clean Transportation (ICCT), released in 2021, analysed eight EVs compared with conventional vehicles. It found that lifetime costs for only one of the EVs were on par with those of conventional vehicles in 2019. For the model with the largest gap, the cost of ownership was around ￡4,700 higher. However, by 2030 lifetime costs for the four BEVs among the eight were predicted to be ￡4,700-￡6,200 lower than that for conventional vehicles. While costs for the other four, which were PHEVs, essentially matched those of conventional vehicles.

Regarding market development, the scale of the EV market will gradually stabilise, with technology and products becoming basically mature and market competition being relatively intense, predicted Liu Bin in his article. Firms will focus more on improving efficiency, reducing costs and seeking competitive differentiation. Liu Bin believes that policy should give more ground to the market at the current stage, allowing incentives to be steadily withdrawn.

However, he also suggested that compared with the scenario of restoring a 10% levy, maintaining vehicle purchase tax incentives beyond 2023 will benefit EV sales to the tune of around 1.3-2.6 million units per year. Continuing to offer EV purchase-tax incentives will significantly accelerate electrification of the transport sector, he wrote. It will also bring forward, from 2030 to 2025, achievement of the 40% target for sales of new-energy-based and clean-energy-powered transportation affirmed in China’s “Action plan for carbon peaking by 2030”, he noted.

What comes next?

“China is still providing support for EVs in terms of policy, but the policy is shifting from carrot to stick”, ICCT researcher Chu Yidan told China Dialogue.

Since 2018, China has operated a “dual-credit” scheme for makers of passenger cars. This involves parallel sets of credits determined by “average fuel consumption” levels and output of “new energy vehicles” (NEVs). Firms that meet the benchmarks are awarded positive credits, while those that fail to receive negative credits. One way for firms to offset negative scores and reach zero is by buying NEV credits from other companies. Those that fail to get to zero have to submit their offset plans to the Ministry of Industry and Information within a specified period, and realise those plans. Otherwise, the offending company is subject to penalties, including suspension from producing and selling high-fuel-consumption products, and from expanding production capacity. To meet benchmarks, carmakers have to produce more, cleaner, and better (having a greater range, for example) EVs. By tightening its policies in this way, China is accelerating its transition towards electrification.

From the corporate perspective, Liu Bin spoke at the CCTP conference about how reducing the green premium on the price of EVs is the key to achieving the transition to zero-emissions vehicles. Only by speeding up cost reductions can stakeholders in the market be lastingly incentivised to drive the transition to clean transportation.

Cost reduction begins with technology upgrading and product differentiation. “Apple phones replaced Nokias because they added new features that won favour with consumers”, says Liu Bin. “New features brought in with EVs include functions for assisted driving and smart cockpits, which also encourage consumers to buy them. If added features do not attract buyer support, however, then the increased costs become a drag on sales instead.” Internal management and strategy also become key factors for a company in reducing costs. Carmakers should consider key nodes in policy development and the changing costs for different models, and determine their targets for profit, production and sales accordingly.

Municipalities may also manage to continue supporting new EV development by providing subsidies and tax incentives in lieu of central government. According to He Hui, project director at ICCT China, there are a range of financial and non-financial incentives that cities can exploit. These include exclusive parking spaces and ultra-low- or zero-emission zones; privileged right-of-way or road use; convenient charging facilities; and reduced or exempted service fees for parking and charging. These can strongly incentivise development of EVs and spur consumer interest in buying the vehicles, He added.

This article was originally published on China Dialogue with the title “Life After Subsidies for China’s EVs” and has been reproduced under the?Creative Commons BY NC ND?licence.