China has dominated the electric vehicle market for the majority of the period that there has been a market to speak of, the rate of market development there outstrips any other region both in terms of penetration and volumes, and this trend has not abated in 2019. The first chart shows Battery Electric and Plug-in Hybrid Electric Vehicle (BEV & PHEV) penetration by regional market and the total volume of sales for the first 9 months of 2019, and highlights the extent of this dominance, with sales in China alone greater than the rest of the world combined.
Consequently the market in China is monitored closely as any loss of momentum in the market would have implications for the entire EV & battery supply chain, from raw materials to charging infrastructure. As such the recent reduction is the size and scope of the government subsidy which has undoubtedly had an impact on the market since its came into effect in July, was always going to generate headlines in a market that has hitherto only seen growth. In this article we provide our analysis of the medium and long-term impact of this change in the subsidy regime, drawing on research from our EV & Battery Quarterly Outlook, the Q4 2019 iteration of which is released at the end of October.
Earlier this year the government announced an incremental phase-down and eventual elimination of EV subsidies in order to reduce market dependence on fiscal support. From July 2019, BEV’s with a range of 400 km or more had their subsidies halved from RMB50,000 to RMB25,000, BEV’s with a range less than 250 km will receive no subsidy.
The second chart shows passenger car and light duty vehicle (PC &LDV) BEV & PHEV sales in China on a monthly basis for the period 2017-2019 ytd. Tracking for 2019, it can be seen that there was a marked increase in June sales ahead of the subsidies removal. There was then a subsequent 50% month-on-month fall in the market in July, and a 16% rise in sales in August, but fell back again in September.
Probably the most interesting thing to note about the sales figures since the subsidy has been curtailed, is the fact that monthly sales in July, August and September were lower than their respective months in 2018. In a market that has known nothing but exponential growth for several years this is quite a turnaround, but is it part of an ongoing trend? And if the market can be moved by the lack of subsides, does it signal a shift in technological focus to fuel cell vehicles where subsidies are, for now, being preserved?
Our view is that this is unlikely on both counts. The first reason for this relates to short-term vehicle market dynamics. On a year-to-date basis for the 9 months to August, sales of BEV & PHEVs are up 26% on the same period in 2018, for PC & LDVs, so the relative slowdown since July should be viewed in the perspective of a very strong first half of the year. Further, there was clearly a strong pre-buy effect in June, which was always likely to hit sales in subsequent months. In addition, sales of all vehicles in China typically increase into the final quarter as well, as can be seen in the chart, so it is likely that the market will continue to recover as the year draws to a close.
The second reason why do not see this as part of major shift in the market is one of longer-term government and OEM strategy. In all markets EV adoption is essentially driven by the interaction between government intervention, in the form of either emissions legislation or subsidies and incentives, and OEMs response in terms of their model line-ups and choice of battery pack size and chemistry.
In the first instance, despite the reduction in the subsidy, the government continues to support EV adoption through more stringent emissions legislation and other incentives. At a national level on the legislation side, the introduction of China 6 (Euro 6 equivalent) legislation puts pressure on OEMs to resolve issues around an inefficient gasoline fleet in terms of fuel consumption and NOx emissions. These measures will only become more stringent over time, and pressure on OEMs to reduce fleet average emissions will become more intense, especially with the introduction of more rigorous WLTP test cycles.
In addition incentives remain in place, the Ministry of Finance announced that New Energy Vehicles (NEVs) purchased from 1 January 2018 to 31 December 2020 shall remain exempt from vehicle purchase tax. At a local level, significant restrictions on the purchase of new ICE vehicles in major cities such as Beijing and Shanghai, continue to push EV adoption.
The government has policy targets for OEMs as well. The NEV mandate specifies credit targets for two years, replacing subsidies with a credit-trading system, which among other targets, specifies that a carmaker must have bought or earned NEV credits equal to 10% of its ICE sales in 2019 and 12% in 2020.
All of which means that both local and international OEMs looking to operate in China will continue to develop zero emissions vehicles as part of their overall strategy in the coming years. As it stands, Chinese OEMs are well ahead of their peers in other markets in this regard, as illustrated in the third chart, which plots EV sales volumes and penetration by OEM for the first six months of 2019. Chinese OEMs as a whole are pushing ahead more quickly towards electrification than automakers anywhere else in the world, and this shows no sign of this slowing down.
Looking at some of the larger Chinese OEMs in turn. At BYD, BEV & PHEV sales already account for well over half of its vehicles sales for the first half of this year, and as a major battery manufacturer its strategic interest is a further push towards electrification over the coming years, across its all of its vehicle classes, including buses and coaches where it is by far the world’s leading manufacturer. BAIC is looking towards 100% EV penetration by 2025, when it will end production of ICEs, Chery is aiming to produce 200,000 vehicles per year by 2020, and Geely plans to electrify 90% of its range by 2020, targeting 30 electric and hybrid models. It is also looking to develop a fuel cell vehicle by 2025.
SAIC Motor, China’s largest carmaker and the local partner for Volkswagen and General Motors, has a strategy focussed on NEVs and intelligent connected cars as well as overseas expansion. SAIC Volkswagen is moving forward with new EV plant Shanghai, and is scheduled to start operation in October 2020, with an annual production capacity of 300,000 vehicles. SAIC announced it plans to install 50,000 public charging points with an investment of $3 billion by 2020.
So how will a change in the subsidy regime affect OEM strategy?
To deal with the issue of whether OEMs will now pivot towards fuel cell vehicles (FCV) owing to a continued subsidy structure for those vehicles, we make the following points. Firstly, the only reason the subsidy for FCV remains in place is because uptake, and therefore fiscal outlay, has been minimal, and it may still be removed shortly anyway. Second, it would seem imprudent for the OEMs and the government to move away from a lithium-ion battery and EV industry where they have a strategic advantage, and where significant investments have already been made, to one where neither of those things is true.
Given that subsidies have to date been range based, their removal is more likely to have an impact on both the type of vehicles coming onto the market and their battery chemistry. As there is no longer an overriding incentive to produce longer range vehicles to qualify for subsidies, we expect that there will be a move towards an increased proliferation of lower range urban focused vehicles, which will be targeted at a market where durability and cost are key, which suggests that an uptick in LFP market share in the battery mix is likely over the coming years.
As such, the curtailment of subsidies both this year, and into the future, is more a sign of EV market maturity and health over the longer-term, and a transition to an industry to one that will need to sustain itself through scale, efficiency and ongoing innovation, in this regard China is likely setting a template for other markets to follow.
By Adam Panayi, Managing Director, Rho Motion