At present, new energy vehicles (NEVs) mainly include battery electric vehicles (EVs), parallel hybrid electric vehicles (PHEVs) and range-extended electric vehicles (REEVs). China’s NEV output was down 2.3% YoY to 1.24 million in 2019, despite higher proportion (up 0.3 percentage points YoY) in the nation’s total auto production (see Figure 1 for details). Sales of NEVs in 2019 were down 4% YoY to 1.21 million.
Product mix of China’s new energy passenger vehicles greatly changed in 2019. In December 2016, the Ministry of Industry and Information Technology (MIIT) issued policies to provide subsidies mainly for A00-grade new energy passenger vehicles, hence the rapid growth in both output and sales of this model in 2017 (see Figure 2 for details). With subsidy policies raising technical threshold after 2018, OEM market gradually focused on A and A0 grades, especially A grade, best-selling model in battery electric vehicle market in 2019.
The government speeded up reduction of subsidies
1. Reduced subsidies were gradually more allocated to infrastructures
NEV subsidies, falling sharply since 2017, continued to drift lower with a faster speed in 2019. However, the auto industry fell victim to the economic downturn. Then came the coronavirus. The government responded by extending full withdrawal of subsidies to the end of 2022, but the subsidies will decrease year by year, as detailed in a notice issued on April 23, 2020.
In addition, the subsidies were required to be more allocated to related infrastructures (e.g. charging pile and service station) instead of the vehicle itself, according to Plan to Improve Charging Facilities of New Energy Vehicles issued in November 2018.
2. Points system helped firms achieve long-term development
In July 2019, the MIIT issued revised Management Measures on Points of Passenger Vehicle Enterprises’ Average Fuel Consumption and New Energy Vehicles (Exposure Draft). The document called for developing fuel-efficient vehicles, and exerting stricter restrictions on traditional oil-fueled vehicles. NEV points were lowered, but proportion increased, according to the document, which kept preferential policies applying to small and medium-sized enterprises.
3. More international corporations entered Chinese NEV market
The government lifted caps on foreign holdings in firms engaged in NEVs or special vehicles in July 2018, stimulating more foreign NEV firms like Tesla to invest in China. Domestic NEV producers faced great challenges.
Demand expanded to cities not restricting issuance of new car licenses
1. Most NEVs are currently absorbed by first-tier cities and cities implementing traffic restriction schemes
Top five NEV consumers in 2019 were Shenzhen, Beijing, Guangzhou, Shanghai and Hangzhou – five places all adopting traffic restrictions based on the last digit of license plate numbers (traffic restriction schemes). Sales in cities with no traffic restriction schemes could not be ignored, taking up over half of the nation’s NEV consumption in 2019. Such cities and second/third-tier cities are all potential markets NEV producers will definitely fight for.
2. A-grade NEVs gradually became mainstream products
A00-grade NEVs lost price advantage rapidly after the subsidy withdrawal, and further lost market shares, which were gradually seized by A grade taking up 54.6% of the nation’s consumption of new energy passenger vehicles in 2019. Competition in the medium and high-end (M&H) NEV market will become fiercer, given firms like BYD and Xiaopeng launching M&H products, more new entrants (e.g. Benz, BMW, Audi and Porsche), etc.
NEV enterprises made great progresses in power batteries
Core components of NEVs, power batteries were greatly improved in technologies and safety. Lithium iron phosphate batteries were gradually replaced by ternary lithium batteries with higher energy density but under relatively big cost pressure arising from changes in subsidy policies.
BYD recently launched blade battery lithium iron phosphate + GCTP, owning battery life capable of competing with ternary lithium batteries and excellent security. Pursuing high energy density of ternary lithium batteries is currently not enough for NEV enterprises, which have to consider safety and cost, both main R&D directions of future power batteries.
Terminal selling prices and product power will be vital to win a victory
Withdrawal of subsidies will directly raise selling prices of NEVs. Compared with traditional oil-fueled vehicles, NEVs have higher manufacturing costs but lower use costs. How to reduce consumers’ concerns over battery replacement after purchase will be a key issue NEV producers need to think about carefully.
With traditional foreign auto companies entering the NEV market, domestic brands will inevitably be impacted. While researching new products, related companies are wise to make full use of advantages such as localized services, differentiated prices, more mature industry chain, etc.