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A year ago, Chinese officials issued a document announcing the termination of the new energy vehicle purchase subsidy policy on December 31, 2022. Now, this 13-year new energy subsidy program has withdrawn from the stage of history.
Judging from the results, this plan is undoubtedly a success. China has become the world’s largest new energy vehicle production and market since 2015. Many rising new energy vehicle companies are ambitious when they enter the international market.
However, subsidies are also accompanied by controversy. For example, the United States and other Western countries opposed the subsidy behavior, which caused trade disputes.
Looking forward, gradually saying goodbye to the “subsidy era” means that the industry will switch from policy-driven to market-driven. How will China’s new car companies respond to this change? Will the chip (chip) ban imposed by the United States on China “stuck the neck” once more? Will the “manufacturing transformation and upgrading” promoted by China be realized with the rise of new energy vehicles?
Subsidies and outbreaks
China has proposed support policies including subsidies almost at the beginning of the rise of new energy vehicles.
In October 2008, Elon Musk became the CEO of Tesla. In the same year, Tesla launched its first car, the Roadster.
In 2009, the Chinese government decided to support this industry, and began to provide car purchase subsidies in 2010.
At that time, the industry was still nascent – from 2008 to 2012, Tesla’s first car, the Roadster, sold a total of 2,250 units, which was already an industry star. In 2011, 8,159 electric vehicles of Chinese brands were sold.
However, the Chinese government not only directly subsidizes new energy vehicle manufacturers, but also reduces or exempts the purchase tax. In cities like Beijing and Shanghai that restrict the purchase and driving of cars, new energy vehicles have become exceptions, which has increased the enthusiasm of Chinese companies to invest.
Stimulated by these policies, the growth of production and sales of new energy vehicles in China is far ahead of other regions in the world. In 2015, the sales volume reached 330,000 vehicles, becoming the largest new energy vehicle market in the world, and it remains so far.
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At the 2021 Shanghai Auto Show, new energy vehicles from various manufacturers will become the protagonists.
However, in 2016, the new energy industry broke out a “subsidy cheating” scandal. At this time, China had subsidized more than 33 billion yuan in the new energy vehicle industry. During the inspection of 72 companies in China, it was found that the amount of financial subsidies defrauded reached 9.27 billion Yuan.
After experiencing this turmoil, since 2017, financial subsidies have been reduced year by year. In June 2019, government subsidies were once once more reduced by a large proportion, with an overall decline rate of regarding 80%. In the next year, until June 2020, the epidemic will be superimposed, and the new energy vehicle market will encounter a one-year downturn. In the first half of 2020, China sold 393,000 new energy vehicles, a year-on-year decrease of 37.4%.
Since then, the industry has entered a new stage. In 2021, the sales volume of new energy vehicles will jump to more than 3 million, surpassing the sum of the previous three years, with a year-on-year growth of 181%, and the industry will usher in an inflection point of multiple growth.
On this basis, it will continue to rise rapidly in 2022. In the first 11 months, sales exceeded 6.067 million vehicles, an increase of more than 100%, and the market share reached 24.96%. This data has already surpassed the goal of “the total sales volume of the new energy vehicle market will reach 20% of the total new vehicle sales in 2025” in the official “New Energy Vehicle Industry Development Plan (2021-2035)”.
Short-term volatility versus long-term optimism
Every time the subsidy is reduced before, there will be short-term sales disorder. Consumers will rush to concentrate consumption before the end of the subsidy, and overdraft the sales in the next few months; secondly, following the end of the subsidy, some car companies will raise prices and test the continuation of sales. increase.
Nishita Aggarwal, an industry analyst at the Economist Intelligence Unit (EIU), told BBC Chinese that the Chinese government has supported the new energy vehicle industry through subsidies for more than ten years. With the end of subsidies, China’s auto industry is expected to become more self-sufficient and competitive, especially as China’s economic growth is suppressed. New energy vehicles will gradually transform from policy-driven to market-driven.
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On April 7, 2021, the 100,000th car of Chinese car company Weilai rolled off the production line. In 2022 alone, Weilai will deliver 122,000 vehicles, an increase of 34%.
However, following the withdrawal of purchase subsidies, new energy vehicles actually still have policy support. Agarwal further stated that, for example, the tax breaks for new energy vehicles will be extended until the end of 2023, and preferential policies will be provided in the provision of parking spaces, license plates, and traffic restrictions. In addition, local governments are expected to introduce their own subsidy measures.
In the long run, new energy vehicles will play an increasingly important role in China’s economy.
“Electric vehicles replace internal combustion engines and transmissions with electric motors, making them fewer parts and less labor-intensive than traditional combustion vehicles, but they are still critical to economic growth.” The Economist Intelligence Unit (EIU) Analyst Arushi Kotecha said electric vehicles are a high-value-added segment of the economy because it includes not only the latest technologies in lithium-ion batteries and semiconductors, but also the vehicle driver assistance parts industry. (such as lidar).
From the perspective of geostrategy, the development of new energy vehicles also has its special significance. Wang Chuanfu, president of Chinese electric car giant BYD, mentioned that China relies on imports for 70% of its oil, 70% of which passes through the Strait of Malacca, and 70% of which is used in the automotive industry. “These three “70%” will stick to our necks and can be easily cut off. One solution is to develop new energy sources and reduce our dependence on oil.”
During the oil crisis in the 1970s, the large-displacement cars of European and American car companies became uneconomical. Japanese car companies began to push small-displacement economical cars to seize the market and successfully became the world’s major car manufacturers.
In this round of energy transformation, the auto industry has undergone tremendous changes, and the advantages of traditional giants have been reassessed. China hopes to change from a follower of Germany, the United States and Japan to overtaking at corners and becoming a leader.
Therefore, compared with established car companies in Europe, America, Japan and South Korea, Chinese car companies have much greater determination and investment in transformation, especially in the forefront of power batteries and intelligence.
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International ambitions and challenges
“The subsidy program has boosted the sales of electric vehicles, promoted the development and production of China’s domestic market, and domestic electric vehicle companies have benefited greatly.” Agarwal said that following Chinese car companies have formed scale and technological advantages, they are also getting more and more successful in the international market. Increasingly popular, exports are surging. Even some Western car companies are using their Chinese factories to export electric vehicles to other countries.
Domestic sales are booming, and exports are also booming. In Europe, one out of every 10 new energy vehicles comes from China; in the first 11 months of 2022, China exported 2.78 million vehicles, surpassing Germany and becoming the world’s second largest vehicle exporter. 593,000 vehicles, doubled year-on-year.
However, Agarwal cautioned that the end of the subsidy will force the consolidation of China’s electric vehicle industry and the emergence of a competitive global leader. He expects that from 2023, the growth of China’s new energy vehicles will become more flat, but its share of the global new car market will continue to expand.
In terms of brands, Chinese auto consumers are willing to pay a higher premium for international brands. However, with the development of the past 13 years, consumers have a higher degree of recognition of Chinese-made electric vehicle brands.
On December 22, the consulting firm McKinsey released a report stating that a survey of 2,388 Chinese consumers showed that they believed that the five most well-known fuel vehicle brands were all foreign-funded, while the five most well-known electric vehicle brands, except for the No. One is an American car company, and the rest are Chinese brands. 43% of them said that they are unwilling to pay a premium for international brands over local brands, and this proportion is as high as 51% among electric vehicle owners.
McKinsey also believes that the luxury car market currently has fewer electric vehicles to choose from. If Chinese auto brands want to enter this market, there is still a window period of three to five years.
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Huawei, which has been hit hard by the United States in the field of communications and mobile phones, has also entered the new energy vehicle industry, and cooperated with car companies to launch a new car “Wenjie”.
However, this window period also comes with risks. Currently, automotive chips account for 11% of the entire chip market. Unlike traditional fuel vehicles, chips are becoming more and more important in the field of new energy vehicles. In the future, the automotive industry will increasingly rely on chip supply.
The United States has obviously also seen this, and the ban on chips has continued to escalate. U.S. President Joe Biden said in a public speech that electric vehicles use an average of regarding 3,000 chips, more than twice that of non-electric vehicles.
Many Chinese car companies have entered the fully competitive international market, but have to face the constraints of the US chip ban, which may put them at a disadvantage when competing with their Western counterparts.
In August 2022, the United States issued a “core limit order” for artificial intelligence chips such as Nvidia A100 and H100 exported to China. Although not directly used in electric vehicles, the two chips are critical to the training of artificial intelligence (AI) algorithms, including autonomous driving.
Major Chinese EV manufacturers such as NIO, XPeng, and Li Auto are all using the aforementioned chip training algorithms. Among them, Weilai is one of the first car companies to announce cooperation with Nvidia A100. At the end of 2021, Weilai announced that it will use the supercomputer built by Nvidia A100 to train autonomous driving.
Only two months later, the United States further strengthened its control over chip exports, prohibiting the sale to China of DRAM chips of 18 nanometers and below, NAND flash memory chips of 28 layers and above, and logic chip production tools of FinFET processes of 14 nanometers and below. Kotecha believes that the current impact is limited, but as competition intensifies, the US government may expand the scope of restrictions.