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Challenges Facing China’s Key Low-Carbon Energy Industries – New Energy Vehicle Sector
Challenges Facing China’s Key Low-Carbon Energy Industries – New Energy Vehicle Sector
Red light. Image credit: Pexels.

In the past, the Chinese NEV industry grew against a backdrop of favorable government policies. For nearly a decade, the Chinese government has poured money into the industry, offering generous tax incentives and subsidies for carmakers and consumers, building charging infrastructure points across the country, and placing restrictions on the sales and use of gasoline cars. Subsidies have played a vital role in making electric vehicles more affordable to consumers. While up-to-date data aren’t publicly available, the Chinese government disclosed last month it had handed out CNY 22 billion in EV subsidies to companies in 2017.

As a result, since 2018, more electric cars have been sold in China than in the rest of the world combined.

However, the NEV manufacturers are facing several challenges, such as the US-China trade war, subsidy cuts, reduced global demand and inferior technology.

The US-China trade war affects the NEV industry by reducing the market size – making it costly to reach the US market through tariffs. Although most of the firms reacted to the US-China trade war by diversifying their market and start expanding in various developing countries, it still poses a challenge as some countries, such as India, influenced by the policy and now considering taking protectionist measures.

But the biggest challenge is to be found on the government side. The country has been slowly rolling back a generous 5-year subsidy program for NEVs, which began in 2016, saying it has plans to phase out subsidies after 2020, amid criticism that some firms have become overly reliant on the funds. The latest subsidy cut took effect last year in June when the government cut subsidies of as much as CNY 50,000 per EV by half.

Chinese NEV sales then began falling in July and have been dropping since. China’s top EV makers have since slashed their earnings outlooks and analysts have recently questioned whether startups like NIO will survive.

Other critical challenges for the NEV industry are slowing global demand and fierce competition in the domestic market. Last year, not only in the NEV industry but the automobile industry, in general, experienced lower sales rates due to slowing demand. A lot of startups like Xpeng and NIO were not able to hit their projected amount of EV sales in 2019. Reduced demand is due to such reasons as the slowing global economy, reduced subsidies, and the recent shock of the COVID-19 pandemic.

Next, in terms of battery life and safety measures, Chinese EVs fall behind the global brands. There were at least 40 incidents of NEV fires in 2018. In 2019 alone, three Beijing Electric Vehicle (a subsidiary of state-owned BAIC) units of the same model caught fire.

Lastly, the Chinese NEV market is full of manufacturers – some 500 manufacturers registered in the country last year – that produce almost identical vehicles. In addition to that, global automakers such as GM and Volkswagen are also expected to intensify their efforts in China, bringing higher technology and brand recognition. They are starting to manufacture their own EVs locally.

Therefore, the competition is high, making it very costly for new companies to survive.

Perhaps the best way to deal with these obstacles is to invest in technology and secure company financials. Reduced subsidies pose a significant threat to the companies’ ability to increase revenues – in the end, this is not all bad news.

In the future, subsidy cuts will eliminate some of the 500 NEV companies from the market, which will create more business opportunities for the ones with better funding and innovative solutions. In addition, Chinese NEV manufacturers have an advantage in terms of attracting overseas consumers with lower prices – Chinese NEVs are almost  75 percent cheaper than their overseas counterparts. Furthermore, the NEV industry is also welcoming foreign investors and putting efforts into improving their battery and car technologies – which in turn could make the sector more profitable.

All in all, it seems like these challenges will affect NEV business more than expected. More established companies might survive by increasing their technologies and raising funding, but startups will likely suffer.

Editor: Luke Sheehan

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