By prioritizing homegrown electric vehicle (“EV”) manufacturing and encouraging their sale through consumer subsidies, tax breaks, and other incentives, China has built the world’s largest market for EVs. Despite the recent draw down in consumer subsidies, the fruits of coordinated policy and business have resulted in a highly competitive market with over 300+ EV makers within the sector. Furthermore, with tens of thousands of companies working in areas related to “new energy vehicles,” and with shares of EV producers like Nio and Xpeng surging, China’s electric car sector is enjoying its moment in the sun.
Even with the gradual ebbing of Beijing’s generous subsidy program, the head start it provided paved the way for consumer demand for EVs, as well as created competition among producers. However, too much competition can lead to an oversaturated market and under-utilization of production capacity in the industry. Well, this time has come, and China has vowed to consolidate the country’s electric vehicle market to strengthen the sector’s strongest firms.
In its place, the “dual-credit” system will become the next key driver of the new energy vehicle industry, with it providing incentive for automakers to invest in the production of electric vehicles. Overall, the system should uphold a trend of more innovative products at lower prices, which in turn will present producers with an opportunity to penetrate foreign markets and establish a foothold in the West.
Why Is China Prioritizing EVs?
The rapid growth of China’s automotive sector has had numerous positive benefits – a greater range of options in terms of housing, employment, and leisure activities. On the other hand, with car ownership growing from 45.75 million in 2009 to 225.09 million in 2019 and China’s vehicle stock expected to grow by 200 million units between 2020 and 2040, the country has suffered from worsening air quality, increased traffic congestion, and a significant rise in energy consumption. A booming automotive industry also means a growing dependence on oil imports, with China’s oil consumption rising 5% in 2019 before COVID-19 hit, slightly faster than the average of the previous five years.
To combat growing environmental concerns and support long-term visions like carbon neutrality, Beijing imposed supportive measures to encourage the adoption of plug-in electric vehicles (EVs). Not least among these measures was the implementation of a generous subsidy program aimed at driving down the costs of electric vehicle purchases, since buying an EV costs more than buying a conventional internal combustion engine (ICE) vehicle. The consumer subsidy program was implemented in 2009, when the central government released a plan for subsidies to launch in select pilot cities throughout the country, and was subsequently rolled-out nationwide in 2013. Though tier specifications have varied with time, subsidies were primarily distributed by vehicle range, with larger subsidy amounts typically granted to vehicles with longer ranges.
Transitioning to the Dual Credit System
Now, Beijing has begun gradually discontinuing its subsidy program and pushing for consolidation within the market to strengthen the most competitive firms with the most potential. While the consumer subsidy program helped build basic consumer demand, it also led to many Chinese NEV producers biting off more than they can chew. Despite the more than 300+ EV producers in China, the top 15 accounted for more than 1/3 of total sales in August 2021. In fact, some of China’s NEV producers produced over 100,000 cars in 2020 and yet posted no sales. The industry is oversaturated and primed for consolidation.
The industry is now supported primarily through a ‘carrot and stick’ program unveiled in 2017, known as the Measures for Passenger Cars Corporate Average Fuel Consumption and New Energy Credit Regulation, or more commonly known as the “dual credit system.” The dual credit system assesses carmakers according to their efforts to cut fuel consumption while simultaneously producing new energy vehicles. Carmakers can accumulate credits through the production of gasoline vehicles that produce less emissions than the country’s standards, or by producing hybrid vehicles, plug-in EVs, or fuel cell cars. As of the rule’s most recent update, vehicle producers are required to generate NEV credits equivalent to 18% of their total sales. This system incentivizes companies to produce more energy-efficient vehicles, while providing companies with relative autonomy in choosing their approach to meeting the specified industry standards.
Since the system’s implementation, the “dual-credit” policy has become one of the most successful policies globally in incentivizing EV production. Several Chinese companies have even been willing to sell electric vehicles below production cost, so long as they continue to drive large revenues from selling carbon credit to ICE vehicle producers. On top of this, carmakers have increased their investment in research and development, rolled out more new energy vehicles, and improved passenger vehicle fuel efficiency since the adoption of the dual credit policy. Statistics show that average fuel consumption stood at 5.5 liters per 100 km in 2019, down 10% from 2016. Chinese consumers also bought 1.79 million electric vehicles over the first eight months of 2021, up 194% from the same period last year. For reference, traditional ICE auto sales saw 14% growth in the same period.
Drivers of Electric Vehicle Market Growth
Electric vehicle sales lost momentum in China during the first few months of the pandemic, and a steep drop in oil prices reduced the incentive for some buyers to opt for electric. Still, as the Chinese economy began to recover from the effects of COVID-19, sales of NEVs began to rebound.
In an environment in which producers need to generate credits from selling more efficient vehicles, China is now incentivizing innovation, while consumer subsidies on the other hand incentivized mass production. Car makers are beginning to innovate by either making their cars cheaper or improving their quality.
Investment and Affordability
In China, the cheap, compact EV is king. In fact, micro-EVs command 37% of the market share. One prominent example is a US$4,400 hatchback called Hongguang Mini EV, made by a joint venture between General Motors, Liuzhou Wuling Motors, and state-owned SAIC Motor. The Hongguang Mini has shown producers’ capability to scale down price while still being able to allow for a decent vehicle range, which in this case is 120 km. The low price-point has paid off: the mini-EV has been China’s best selling EV for about a year, clocking in 30,000+ sales a month.
Brand-Name Quality Carves Out EV Market Share
In the Chinese domestic market, consumers are becoming more confident that EVs made by new startups like NIO and giants like BYD are well-designed, of good quality, and reliable. NIO, founded in 2018 and now listed on the New York Stock Exchange, has a lineup of only three electric vehicle models and has so far delivered a total of just over 63,000 vehicles. BYD, another market leader, sold around 200,000 new energy passenger cars — including plug-in hybrids — in the first seven months of 2021, 28% higher than the same period in 2019. These two firms have practically become synonymous with the idea of Chinese NEVs.
Chinese rivals Li Auto and Xpeng focus more on higher end segments and both reported record deliveries in July. As a testament to the importance of quality, Li Auto only sells a single vehicle model, the Li Xiang One SUV, of which it sold 55,000 in the first nine months of 2021 alone.
Tesla Applauds Local Carmakers
Even China’s domestic firms’ most prominent rivals have acknowledged their leaps and bounds in innovation and design quality. Elon Musk, the high-profile CEO of Tesla, praised the growth potential of the Chinese market and highlighted innovations among Tesla’s rivals in recorded remarks at the World New Energy Vehicle Congress in Hainan. Musk stated that China’s EV companies were so competitive because many excel in software development. Many firms have contributed greatly to autonomous driving software and mobile device integration, of which both are critical to the future electric vehicle environment.
How Will Chinese Carmakers Shake Up Western Markets?
The increasing strength and competitiveness of China’s domestic EV industry has encouraged an overseas push by Chinese EV makers and startups to attempt to penetrate foreign markets. Consumers abroad, especially those in Europe, will make this task easier, given their increasing friendliness towards Chinese-made cars that boast innovative, more appealing designs. Chinese start-up NIO, for example, delivered its first shipment of EVs to customers in Norway this month. By the end of 2021, the company hopes to have four swap stations in and around the Oslo region. The company also plans to open its first NIO service and delivery center in Oslo.
Chinese automakers are also hopeful that more affordable prices will make the push into Western markets easier. Electric car pricing has moved in the opposite direction in Europe and the US as compared with China. Sales in Europe of domestically-made cars are mostly upmarket and comprise very expensive vehicles, while small electric cars at the entry level are still perhaps three times as expensive as internal combustion engine (ICE) equivalents. The average price of EVs in China has fallen by 47% since 2011, while US and European markets have seen EV prices rise over the same period by 38% and 28%, respectively. Since many European electric cars are deemed as too expensive for average consumers, they can be eclipsed with ease by Chinese competitors that gain a foothold in the European market.
Looking Ahead: Competition Is Coming for China’s EV Market
Now, with China’s competitive EV industry showing promise, Beijing’s leadership hopes to consolidate firms within the sector and weed out those deemed to have less potential and overcapacity. According to Xiao Yaqing, the Minister for Industry and Information Technology, “Looking forward, EV companies should grow bigger and stronger. We have too many EV firms on the market right now.” Xiao said this at a press conference in Beijing when referencing the oversaturated market. Regulators are considering setting a minimum production capacity utilization rate for the industry, and provinces that are not meeting it will not be allowed to approve new projects until surplus capacity comes online. If capacity utilization in a province falls below a set threshold, Beijing will prohibit the local government from green-lighting new production facilities until firms close the shortfall.
The long-term consequences of this push remain unknown, and policymakers do not have a crystal ball to predict what will work. However, officials are hopeful of two effects triggered by consolidation. First, China’s listed EV manufacturers are best-positioned to benefit from the government’s push for market consolidation, as tighter regulations shut out smaller firms with less access to capital. New regulations could create an opportunity for larger, well-financed companies to absorb new talent and technology once the smaller firms are consolidated. Bigger players like NIO and Xpeng will likely continue on, but smaller operations that have had a negligible impact on the industry could be taken over by larger players as time goes on. If one thing is certain, the number of unique Chinese EV manufacturers will drop precipitously in the coming years.