Chinese EV Subsidy Elimination Could Mean Trouble for Some EV Companies

Chinese EV Subsidy Elimination Could Mean Trouble for Some EV Companies

By: Raquel Soat

For dozens of domestic electric vehicle (EV) manufacturers, the Chinese market is known as the world’s largest EV market by volume. Like many markets where EV sales are growing, such as the US and Western Europe, China’s EV success is due in large part to government support in the form of subsidies for automakers. These subsidies reduce the purchase price for consumers, making EVs cost-comparative with internal combustion engine vehicles.

However, in June 2019, China cut its subsidies by about half and completely eliminated subsidies for vehicles with ranges under 250 km. The subsidy cut announcement prompted consumers considering an EV purchase to head to the showrooms in anticipation of what was effectively a price increase for EVs after June. The market felt the effect of the subsidy changes almost immediately, with monthly sales of EVs in July 2019 declining 4.7% from July 2018.

Demise for Some Chinese EV Companies

The Chinese EV market has both domestic and foreign players, but with dozens of domestic and less-established automakers, the fragmentation is likely to lead to the demise of some Chinese EV companies. In May 2019, it was estimated that around 500 manufacturers were registered to produce EVs in China, but many manufacturers are now announcing layoffs and cutbacks. In August, NIO announced layoffs for over 1,000 employees. Many EV companies in China are expected to go under, particularly domestic startups, once sales numbers begin to decrease due to the subsidy elimination.

EV investment is slowing in China, meaning non-established companies that rely on large investments to continue operation face an uphill battle as subsidies dwindle. A few segments of EV makers in particular face significant difficulties:

  • Manufacturers that only produce EVs with ranges below 250 km due to the complete elimination of subsidies for those vehicles
  • Manufacturers producing low end market products that rely heavily on subsidies
  • Startups that do not yet have a product in the market

Not the End for the Chinese EV Market

However, the end of subsidies in China isn’t the end of the EV market in the country. Investors may not be interested in floating small, unestablished EV makers, but they are still drawn to top competitors in the Chinese market. The annual sales growth rate for EVs is still growing in the country despite a sales slowdown in the months following the subsidy rollback.

A silver lining in China’s new incentive policy may be absolving the range anxiety challenge by pushing the EV market more forcefully toward the mass market, since China now only offers subsidies for plug-in EVs with over 250 km of range. It may hurt the market in the near term, but in the long term, it may be helpful.

Overall, government support is crucial for countries with small, slower-growth EV markets to take off, but the Chinese market is large enough that it doesn’t need as much government support and is expected to continue growing substantially into the future.

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