Although the sector is home to a competitive fleet of local champions which produce record-smashing numbers of NEVs each year, industry growth remains heavily dependent on government subsidies rather than on strong consumer demand. The future of China's NEV industry will depend on whether the authorities can cultivate enough market demand to compliment—and ultimately replace—this policy-led growth.
China's NEV market has been on a bender over the past four years. From around 17,600 in 2013, NEV sales sprung to almost 500,000 in 2016, according to official statistics. This represented about 40 per cent of the world total, and more than twice the size of the second-biggest NEV market, the US. Strong sales in 2016 also made China's the world's largest NEV stock, now slightly ahead of the US with about 1m vehicles – and a third of the global stock. According to state media predictions, NEV sales will reach 800,000 green vehicles by end–2017.
A strategic sector
Chinese policymakers have included NEV development as a key part of China's five-year development plans since 2001, but it was not until 2010 that the government classified NEVs as a "strategic emerging industry", a designation meant to attract investment through tax and other incentives. In 2012 the State Council (China's cabinet) unveiled an NEV industry development plan calling for annual NEV production and sales to reach 500,000 by 2015 and 2m by 2020, after which NEV sales should average 7m over the next decade.
NEV development makes strategic sense for China. These vehicles are seen as a key part of China's larger efforts to reduce urban smog, about a third of which comes from internal combustion engines. But China also views NEVs as a tool for industrial development: first, it represents a second chance for Chinese firms to capture more of the domestic automobile industry, which is still tilted towards foreign carmakers (despite equity restrictions on foreign ownership), as well as to jump into international markets.
Second, NEV development feeds into China's wider strategy at leapfrogging up the global value chain, enshrined in the Made in China 2025 initiative (MIC2025). Released in May 2015, MIC2025 sets market-share targets for domestic companies across ten industries; directs locally branded NEVs to capture 70 per cent of the Chinese market by 2020; and aims for two of the top ten global NEV companies to be Chinese-owned by 2025. There are already some early wins under this strategy: a number of Chinese companies, including BYD, BAIC and JAC Motors, are already global industry leaders. BYD sold around 100,200 units globally in 2016, compared with Tesla, a US electric-vehicle maker, which sold 83,922 vehicles over the same period.
Finally, NEV promotion feeds into a wider and equally strategic value chain. By promoting NEV sales, the government supports its lithium-ion battery makers, a sector in which China also aims to develop global market leaders. Goldman Sachs, a US investment bank, estimates that the sector will be worth US$40bn by 2025. Leading in both NEVs and lithium-ion battery production will not just afford China dominance of the future automobile sector, but will also allow Chinese companies to emerge as market leaders across a wide range of industries ranging from smartphones to laptops.
A state-backed boom
A number of generous state-backed subsidy schemes have underpinned China's NEV push. In September 2013 China released a plan providing consumer subsidies of Rmb35,000–60,000 (US$5,700–US$9,700) for consumers looking to buy NEVs between 2013 and 2015. In July 2014 the government announced that 30 per cent of public fleets – including government cars, buses and taxis – would need to be NEVs, and in September of that year the State Council extended the subsidy programme to last until 2020. The authorities also removed a 10 per cent purchase tax on locally made NEVs (a designation including NEVs produced by foreign joint ventures) until end-2017, and introduced a number of other non-financial policies to encourage purchases, including exempting NEV drivers from expensive licence-plate lotteries and registration fees in certain cities, as well as from driving restrictions on certain days (the authorities in some cities, including the capital, Beijing, limit cars on public roads based on their licence plates, in order to reduce pollution).
These state subsidies, albeit generous, have largely supported domestic players. The above incentive policies are available only to locally manufactured vehicles which qualify under both a national catalogue published jointly by the Ministry of Industry and Information Technology (MIIT) and the National Development and Reform Commission, as well as local catalogues published by local government authorities. As a result, these subsidies are largely unavailable to imported foreign NEVs (although NEV models produced by foreign automakers have previously qualified for these catalogues in the past). China's subsidies also reflect the strength of Chinese players: policy support largely focuses on supporting pure battery and plug-in hybrid vehicles, which are the models favoured by China's domestic producers (as opposed to gas-electric or plug-in gas-electric hybrids, which have historically been more popular in the international market).
Despite this strong policy push, however, results have been mixed. In 2015 the country produced around 207,000 NEVs, or about 41.4 per cent of the goal for that year. Although sales doubled to 507,000 in 2016, that number is still far below the 2m goal for 2020, and is much lower than the annual 7m production target from then until 2030.
Subsidy cheating has complicated state support as well: in late 2016 media reports indicated that a number of domestic producers had inflated production numbers, produced vehicles with low-quality batteries or otherwise engaged in fraudulent activities to qualify for NEV subsidies. Although the authorities had originally planned gradually to phase out these subsidies anyway, the scandal pushed officials to slash subsidies earlier than expected, resulting in a fall of 74.4 per cent year on year in NEV sales in January 2017, according to the China Association of Automobile Manufacturers (an industry group).
What next for China's NEV market?
In the light of these policy challenges, China has adopted increasingly frenetic efforts to meet its ambitious production targets, largely by pushing industry players to shoulder the burden on NEV development. These moves have proved controversial; in September 2016 draft rules from the MIIT mandated that all automobile manufacturers devote 8 per cent of their sales to NEVs to be battery electric or plug-in hybrid vehicles starting by 2018, with this percentage at 10 per cent in 2019 and 12 per cent in 2020. Automakers that miss these quotas will be forced to purchase "credits" from NEV makers. While the automobile industry lobbied against this plan, claiming that these targets were too ambitious for industry to meet, the authorities finalised this policy in September 2017 – although enforcement will not begin until 2019.
Strong policy support, however, has largely failed to address systemic challenges within the market. China's car market is very price-sensitive, and NEVs are substantially more expensive than (comparable) conventional cars. Without subsidies to encourage buyers, demand could fall dramatically: BYD saw both sales and profits plunge after subsidies were cut in January 2017. Technical reasons have also prevented widespread adoption – historically, China has lacked widespread NEV charging infrastructure, while existing infrastructure has used different charging standards between different cities, creating problems of inter-operability.
Yet policymakers are undeterred. The government is aware of these infrastructure challenges and has pledged to build and upgrade more stations to comply with a unified national charging standard by end-2017. In September China announced that it would ultimately phase out all non-electric vehicles on the nation's roads by an unspecified date, and the authorities began discussing the possibility of further opening the sector to foreign investment, which may bring in new technology to drive innovation. The road forward will be bumpy, but China is determined to drive on.