China’s Auto Electrification Revolution

The Chinese government adopted in 2009 a plan to leapfrog current automotive technology， and seize the growing new energy vehicle （NEV） market to become of the world leaders in manufacturing of all-electric and hybrid vehicles.

The stock of new energy vehicles in China is the worlds largest. The Chinese government uses the term new energy vehicles （NEVs） to designate plug-in electric vehicles eligible for public subsidies， and includes only battery electric vehicles（BEVs） and plug-in hybrid electric vehicles （PHEVs）.

Chinas New-Energy Vehicle Policies

Sales in China of new-energy vehicles rose from around 8，000 in 2011 to more than 500，000 last year， amounting to 40% of global output.

It was something of a shock to the auto world when China announced that it will join the U.K. and France in totally banning the sale of internal combustion vehicles.

Although no specific date for the ban has been announced， this long-term commitment set the general tone for the future of automakers who want to sell cars in the worlds biggest vehicle market.

Sales in China of new-energy vehicles （NEVs）— a category that includes hybrid cars as well as those powered exclusively by batteries or hydrogen fuel cells — have risen from around 8，000 units in 2011 to more than 500，000 last year， 40% of global output， according to the China Association of Automobile Manufacturers.

This huge increase has been driven by a series of national policies to charge up this fledgling market.

A Massive Financial Burden

Beijings subsidization of NEVs began in 2010， when Beijing identified the sector as one in which the country could leapfrog its foreign rivals and perhaps come to dominate.

What came along with the subsidies was an exponential growth in sales.

However， the sheer number of manufacturers — including those without the relevant qualifications — rushing into the sector meant that there may be too many electric cars now being produced. The Chinese authorities said they have started an investigation into overcapacity in the sector.

Generous， years-long subsidies have placed a massive financial burden on the government with one expert estimating in 2015 that the program will cost central and local governments more than 400 billion yuan （$60.4 billion） — more than Luxembourgs gross domestic product in 2016 — during the five years through 2020.

With the downsides of state handouts， which have also led to widespread fraud， becoming apparent， China announced that it will completely phase out the subsidies by 2020. Beijing intends to slash subsidies by 20% from next year， instead of as in 2019 as originally planned.

Tax Rebate

The tax waiver， rolled out in 2014 along with other state subsidies， have helped make China the worlds largest electric vehicle market with more than 500， 000 units sold last year， almost half of global output.

China is planning to extend a tax rebate on the purchase of new-energy vehicles as part of efforts to boost the countrys fledgling green transport industry， several sources close to policymakers said.

The government will continue to waive the current 10% purchase tax on new-energy vehicles — a category that includes hybrid cars as well as those powered exclusively by electric batteries or hydrogen fuel cells — until 2020， people with knowledge of the matter said. The current tax rebate policy is due to expire at the end of the year.

The tax waiver， rolled out in 2014 along with other state subsidies， have helped make China the worlds largest electric vehicle market with more than 500，000 units sold last year， almost half of global output.

But， lucrative state handouts have also led to overcapacity， prompting a government probe into“low-quality， blind expansion” in the electric vehicle manufacturing sector in October， according to the Ministry of Finance.

Earlier investigations also uncovered widespread subsidy fraud where some companies tried to pass off conventional vehicles as new-energy models by installing an electric battery or falsified data to qualify for state support.

In a bid to weed out weaker players， China announced it will completely phase out subsidies to electric vehicle-makers by 2020. Beijing intends to slash subsidies by 20% starting next year， instead of waiting until 2019 as originally planned， sources close to policymakers said.

Instead， Beijing unveiled a quota system in September that requires all carmakers to ensure that a certain percentages of sales come from low- or zero-emission vehicles， starting from 2019. The quota will be gradually increased， forcing automakers to buy “credits” from other producers for every conventional car they make.

The Future of State Support

To replace the subsidies， the government plans to roll out a quota program. This means that the burden of supporting NEV development will be borne instead by carmakers， who will have to ensure that a certain ratio of sales come from low- and zero-emission vehicles.

When the program， which went through a one-year public consultation， was formalized in September， some companies were relieved to find out that they had an extra year to prepare.

Under the latest cap-and-trade program policy， automakers must obtain a certain amount of credits — which are related to the various types of NEVs — in 2019， instead of in 2018， as previously planned. This amount will rise by a fifth in 2020.

This amount of credits could amount to 4-5% of actual vehicle sales for most foreign automakers， according to analysts.

Market Response

When the draft plan came out last year， German manufacturers expressed concerns that the rigid quota system will leave them lagging behind their Japanese and American counterparts， who have an edge in low-emissions vehicle technology.

In a proactive measure to meet Beijings demands， Volkswagen in May announced that it will establish its first firstever wholly-electric car joint venture with Chinese partner JAC Motors， dedicated to producing electric vehicles in the country.

Others have since announced similar plans， including Americans General Motors and Ford， and French and Japanese alliance Renaut-Nissan.

Still， some foreign brands are concerned that Beijing may be pushing the electrification revolution too fast and too aggressively.

Jochem Heizmann， CEO and president of Volkswagen Group China， has called for Beijing to refrain from setting stricter quota standards in the years after 2020， as targets for subsequent years have yet to be issued under the current policy framework. He said that market forces should have a say in consumer product choices.

Electric Car Permit

Beijing started issuing permits that allow companies to produce only electric vehicles in bid to foster competition in the predominantly state-owned auto industry in June 2015.

Compared with getting a license to produce traditional cars， acquiring one of the permits requires firms to meet lessstrict standards and jump lower technological hurdles.

Many companies have rushed to grab such permits， with 15 companies obtaining such licenses from the government， including Volkswagens joint venture with JAC.

But Beijing cancelled the initiative in June due to concerns that allowing so many companies to enter the market may create a glut， leaving at least 20 companies who have filed applications high and dry.

To avoid being elbowed out of the increasingly competitive market， smaller players have begun to partner with larger companies. For example， internet entrepreneur William Lis electric car company NIO has announced a partnership with JAC.

China has long banned foreigners from owning more than 50% of any automaking venture with a Chinese partner. But by June 2018， the current limit will be eased as long as automakers are producing new-energy cars in free trade zones， according to the Foreign Ministry.

In addition， Beijing has relaxed its rules and allowed foreign carmakers to form a third China joint venture if that venture makes NEVs. Previously， all foreign firms were limited to just two auto joint ventures.