China's EV makers get ready for subsidies to end

To ensure survival in the post-subsidy era and deal with overcapacity, some are switching their focus to the corporate sector or leaning on high-tech to overcome price-sensitivities.

China's electric vehicle makers face an uncertain road ahead as the government prepares to back out completely from state support of the industry.

There are, arguably, parallels with the solar panel industry, which also endured subsidy cuts, leading to the first-ever Chinese US dollar bond default as well as the first onshore bond default half a decade ago.

For investors, that's a worrying comparison to draw, but there's no shortage of capital just yet for the best-backed Chinese EV manufacturers, given the success in January of New York-listed Nio's convertible bond issue and WM-Motor's latest round of private funding last month.
Some of the 500 or so other Chinese EV startups currently deemed to exist, according to some estimates, might not be so lucky.
Last week, the Chinese Ministry of Finance cut subsidies for electric vehicles once more. It is the last-but-one subsidy cut before Beijing ceases all subsidies in 2020. The notice cut subsidies for EVs with a range of less than 250km and halved those on EVs with a range of more than 250km.

Implementation is scheduled for June, giving manufacturers and buyers a short buffer period. As a result, some EV makers are rushing to deliver cars as quickly as possible before the subsidies are cut further and consumers lose interest. 

Jing Zhu, chairman of Haima Automobile Group, said at the Boao Forum for Asia last week that a lot of Chinese consumers bought EVs to save money, rather than on environmental grounds. So if the government ends the subsidies next year, it is certain that some potential end-buyers will lose interest.

EV sales in China leapt by 61.7% year-on-year to 1.25 million units in 2018 just as overall vehicle sales fell by 2.8% to 28 million units, illustrating both the size and potential of the EV market, as well as the likely challenges ahead.


So some EV firms are turning to corporate clients as they develop autonomous ride-hailing technologies.

Among them is state-owned carmaker GAC Group, whose EV car sales quadrupled last year, easily outpacing the sales growth of its traditional patrol vehicles. 

On its earnings call on Monday, GAC said it would partner with corporate clients such as Tencent, as well as some bus companies, to deploy an autonomous EV fleet in June. It wants to distribute 10,000 vehicles in five cities in this year, starting with the Guangdong-Hong Kong-Macao Greater Bay Area. 

Making EVs will be more expensive once the subsidies are cut, Zeng Qinghong, GAC's chairman, said on the earnings call. But he denied that GAC relied on them to make a profit. He also noted the offsetting impact of the three percentage point cut in VAT that was implemented this month by Beijing.

“We get a lot of compensation from the recently released tax cuts for manufacturing industries,” Zeng said.

Using high-tech features to appeal to more tech-happy, less price-sensitive segments of the market is the other preferred coping strategy among leading EV players.

Perhaps taking the cues from pioneering US doyen Tesla, Chinese EV makers are equipping cars with big screens plus voice assisted and driver-assisted systems and also updating their models constantly with the latest cutting-edge technologies.

"Cars became the biggest application of Internet-of-Things technology," Bin Wang, co-head of Credit Suisse APAC auto research said, at the Swiss bank's Asian Investment Conference last week in Hong Kong.

At the same time, the average mileage per charge on EVs has, broadly, increased from 200km four years ago to the current 500km, ensuring Chinese EVs compete more effectively with petrol-fuelled cars by luring users through the fuel cost savings.

Together with the reduction in subsidies, it's creating a more level playing field and should provide investors with improved visibility amid freer market conditions.   

“Look on the bright side, we now have full clarity on selling prices,” Freeman Shen, chief executive of WM-Motor, told a small group of journalists last week, explaining how the subsidy cuts could ultimately improve cash flow since government subsidies usually only arrive well after cars have been sold. Shen compared the subsidy scheme as a loan by EV makers to consumers.

"With the subsidy cut, EV makers will focus on differentiating their products," He Xiaopeng, EV startup XPeng's CEO, also told FinanceAsia in a separate interview. "The market will be better-categorised and consumers will have more choice." 

So while much of the focus to date has been on the industry's over-capacity, the better-managed, best-funded Chinese EV startups and traditional Chinese carmakers with EV interests appear more focused now on getting on with dealing with the challenges ahead.

Still, there will be losers as well as winners.

As Fitch Ratings highlighted only three months ago in a report, based on what China's automobile incumbents and EV start-ups have announced, the country's EV production capacity could be close to 20 million units by 2020 – that's around 16 times the number of EVs sold last year in China.

There is growing competition from the outside too. While every Chinese EV brand increased its prices by an average of 12% last week after the subsidy cut, Tesla cut the price on its Model 3 in China by as much as 50% to $60,630.


The table below shows the percentage price increases seen this year for some of China's best-selling EV models. The figures in brackets show the range in kilometres these EVs can reach with one charge.


Danny Leung and Alison Tudor-Ackroyd also contributed to this article.

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