New Auto Manufacturing Enterprises Feel Blue as Subsidy Declines Meets Price Reduction
COVID-19 and China
ES6 of NIO. PHOTO: Credit to NIO

NIO is an electric-car startup founded in 2014 and is listed on the NYSE since September 2018. However, last month was a rough month for the investors of NIO; its shares lost nearly half of their value within a month falling from USD 9.57 to USD 5.10.

There are a couple of factors behind the free-fall. First, NIO's stocks have sharply dropped after it got reported on March 5 since its fourth-quarter earnings were below Wall Street's expectations. In these days, investors are increasingly concerned about Beijing's decision to cut subsidies for the EV industry.

NIO has often been compared to Tesla during the nascent stage of it. Recently, however, it is hard for one to compare NIO with Tesla. On the one hand, China is in the midst of a cyclical slump in auto sales; for the first time in several years. With the subsidy cuts, it will be tougher for small companies, such as NIO.

NIO's administration for first-quarter deliveries wasn't excellent, but the company stated that it did better than it expected. NIO is planning to deliver 3500-3800 vehicles in the first quarter of this year, and the actual number of delivery is around 3989; and, NIO has delivered 1373 vehicles in March. Maybe it means something, but not enough to be wildly optimistic about NIO's near-term sales prospects.

After launching the incentives to encourage the development of the EV industry in 2010, Beijing had begun paring the subsidies since 2017.  Companies are facing a decline in orders and struggling to cover the gap. The resulting loss of profits has forced many companies to rethink their strategies; some EV makers seem destined to be eliminated as this support ends in 2020. What's more, some fraud cases arose surrounding the subsidies in 2016 and 2017, and Beijing has begun to close the spigot since 2017.

China's EV makers are struggling to break their dependence on government incentives. BYD has announced a massive decline in net profit in 2018 as the company spends heavily to keep prices attractive.

Diminishing subsidies for new-energy vehicles have put pressure on the earnings, BYD said. Net profit fell by 31.6% to CNY 2.78 billion ($414 million), even as revenues surged by 22.8% to over 130 billion yuan. Electric-car unit sales roughly doubled to nearly 248,000. Last year, BYD's operating profit margin shrank to 3.3% from a peak of 5.8%.

Why big cuts? Part of the reason is domestic Chinese politics; China's subsidies, which depends on how many units have automakers sold. Beijing doesn't want local and regional governments to give advantages to local automakers using protectionist policies. The government wants to ensure that up-and-coming manufacturers of electric vehicles and plug-in hybrids aren't just relying on subsidies as well.

"Five Chinese automakers, led by BYD, controlled a majority of the green passenger car market, " said the China Passenger Car Association.

The trend has spurred many automakers to revise their plans. In March, BYD halted its business at a Guangzhou electric bus factory because of the facility had entered the off-season. It is suspected that the closure stems from the decline in bus orders. NIO was cancelling plans for the Shanghai manufacturing plant, as well. 

The Chinese government began requiring both domestic and overseas-based automakers to produce a number of new-energy vehicles, equivalent to 10% of their total production and import volume. 

Domestic automakers still hold the lead, but overseas players are preparing an offensive as Beijing's support approaches its end. In April 2018, China said it would roll back restrictions on investments by foreign automakers into the domestic new-energy car ventures. Next month, U.S. electric vehicle maker Tesla moved ahead with plans for a wholly owned Shanghai electric vehicle factory under a local branch.

In this process, the new forces of car making bear the greatest pressure on the whole market. Of course, the introduction of new policies and the reduction of subsidies are within the expectations, and auto companies must have countermeasures.

The new 13% VAT rate came into effect on April 1, after some carmakers began to cut official guidance prices ahead of schedule. It seems that this price cut started with Tesla and some multinationals cutting their guidance prices, too. Several price cuts of Tesla can be understood as benefit improvement brought by tariff reduction and scale reduction. What's more, it is a free advertisement for Model 3 and Model Y.

Auto enterprises usually have two promotion methods; traditional one always maintain the original price, the new one always guarantees the price after the subsidies subtracted.

It is rare for multinational automobile enterprises and independent brands to reduce prices at the same time, which is to follow the policy adjustment, but also to cope with the cold winter of the automobile market and a more intense market. Price is an important weapon when branding is not enough to change the market.

With the decline of subsidy policy and direct competition from traditional automobile companies, the new automobile manufacturers will face a life or death situation in 2019. If the USD 200,000 Model 3 arrives in China, the scene may be even more nervous.

By 2020, subsidies may be negligible, but the "double integral" policy, popularized charging piles and faster-charging speed are all expected to bring sustainable development power for new energy vehicles.

Both the design, manufacture and sales of the new models need to be more forward-looking to cope with the rapidly changing market. Of course, the key to the success of EV will be the range and autonomous driving in the future.

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