China began cutting back its electric car incentives dramatically early this year. The results have been predictable, as sales of EVs have plummeted. BYD reported its earnings in the 3rd quarter were off a whopping 89%. On November 11, the China Association of Automobile Manufacturers announced sales of electric, hybrid, and fuel cell cars plunged by over 45% in October, marking four straight months of declines in the sector.
“Because of the insufficient demand of the domestic market, the pressure for automakers to upgrade their technology to the national standard, and the major subsidy cuts for new energy vehicles, the recovery of production and sales is still limited,” Chen Shihua, assistant secretary general of the group, told CNN Business. “Based on the current developing trend, we may see negative growth for new energy vehicles this year.”
To make matters worse, government officials in China are talking about lowering EV incentives even further, although the precipitous drop in the sale of new energy vehicles has caused some hesitancy to proceed with those further cuts. Still, the country wants 20% of all new car sales to be NEVs by 2025, which means nearly 7 million sales a year by that date. By some estimates, the Chinese new car market could be as large as 40 million vehicles a year in the near future.
So what’s going on? CNN makes it pretty clear. Part of the government incentive package included inducements to manufacturers to make new energy vehicles. Chinese people react to the scent of money pretty much the same way people everywhere else do. Wave a fistful of dollars under someone’s nose and they set out to reap the reward. China finds itself with 486 new energy vehicle manufacturers right now. Many of them are churning out useless crap that sits unsold in vacant lots. Others are priced cheaply enough to attract buyers but are of such low quality they give the entire segment a bad name, which isn’t good for future business.
“People currently associate EVs with some form of government welfare being handed out,” says Tu Le, founder of Sino Auto Insights, a consulting firm based in Beijing. He says the latest sales data marks “a huge hiccup” for Beijing, “but it doesn’t dissuade what their long term plans are.”
China is determined to separate the wheat from the chaff, as it were, and promoting the survival of the fittest while eliminating the charlatans who are only in it to collect the lucrative government incentives on offer. And that, says CNN, may be leaving the door wide open for foreign manufacturers like Tesla and Volkswagen, both of which have begun producing electric cars in new Chinese factories in the past few weeks.
Traditional automakers benefit from having an established brand, Le says, while many EV startups in China are still new to the market and “need further incentive for the Chinese consumer to purchase [from them].” Where many Chinese startups have focused their attention on premium vehicles with premium price tags, both Tesla and Volkswagen will be offering more affordable electric cars to Chinese consumers. “That’s where I think that difference is going to come in,” Le says. “The bulk of the sales are going to be driven by the foreign [automakers] at these different price points.”
60 years ago, imports from Japan, Germany, and the UK forced US manufacturers to learn how to make smaller, more efficient cars. Now foreign manufacturers may show the Chinese how to build affordable electric cars. “This is really kind of an extreme case of testing the Chinese government’s flexibility on what they need to do, or what they should back off on, in order to keep the momentum moving forward,” Le says. “I think they see reinforcements coming in through foreign automakers. I think that will boost sales.” Is he right? “We’ll see,” said the Zen master.