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Maya Xiao

Maya has an interdisciplinary technical background in system automation, renewable energy, and intelligent connected vehicles. She is supporting APAC’s operations and responsible for Interact Analysis’s Chinese industrial automation and NEV research.

Overheating Chinese NEV market facing risks; policy adjustment brings new opportunities for foreign companies.

Key Points:
  • The impact of policies over the past five years has led to overheating in China’s new energy vehicle (NEV) market. In the next few years, the government will gradually weaken the impact of policies on the market, bringing supply and demand back into sync. 
  • Commercial vehicles for specific applications, such as logistics, are about to be the next market segment to achieve full electrification following inter-city bus.  
  • China’s NEV market is in a transitional phase from policy-driven to market-driven. With the complete opening for foreign-invested manufacturers in 2018, competition in the NEV sector is predicted to increase, creating a new opportunity for foreign entrants.

Local Overheating in NEV Market Leads to Serious Overcapacity

The promotion of NEVs in China began in 2009 and has gone through three stages: pilot demonstration -> gradual expansion -> national promotion. However, behind the prosperity of the NEV market, the problem of structural overcapacity has become increasingly serious:

  • In terms of total volume, the risks of overcapacity of NEVs and power battery both increase. According to the production plans officially announced by OEMs in August 2018, a total of over 20 million new energy vehicles (NEVs) will be produced in China by 2020, which will be 10 times the goal of the mid- and long-term development plan for the NEV industry released by the Chinese government. At the same time, due to blind capacity expansion, the utilization rate of power battery production facilities continues to decline, and it has been lower than 40% in 2017. 
  • In terms of industrial structure, high-end production capacity is insufficient and low-end production capacity is excessive. New energy vehicles with a price below CNY 100,000 accounted for more than half of sales. Some low-level enterprises have adopted low-quality and low-price competition to disrupt the market and have affected the overall level of industrial development.

To ensure the healthy and sustainable development of the NEV industry in the future, several government departments are examining ways to adjust and optimize industrial support policies in a timely manner to avoid overheated investment or severe overcapacity. Relevant initiatives in 2018 include:

  • Improving the market access threshold – Production qualification limitation 
  • Strengthening market supervision – Dual-Credit policy 
  • Linking incentive policies to technical indicators – Subsidy Adjustment

Commercial Vehicles for Specific Applications to Be the Next to Move Toward Full Electrification

According to our analysis of the Chinese NEV market, after inter-city buses achieve full electrification, the order of replacing fuel vehicles with new energy vehicles is expected as follows (considering cost, technology and supporting facilities):

  1. Commercial vehicles for specific applications (e.g. logistics vehicles)  
  2. Passenger vehicles for public transportation (e.g. car sharing)  
  3. Passenger cars for private use  
  4. Heavy-duty commercial vehicles 

Long-distance transportation of heavy-duty commercial vehicles is limited by various technical factors such as battery weight, battery efficiency, charging technology, charging facility construction, drive motors as well as cost of ownership considerations. However, air pollutants emitted by heavy-duty trucks account for more than half of the total pollution from transportation in China. As the Chinese government pays more attention to environmental protection, emission policies (implementation of the China V emission standard from July 1th, 2017, China VI emission standard from July 1th, 2020) are likely to be the driving force for the electrification of heavy-duty trucks. 

Moreover, after the explosive growth of the new energy commercial vehicle market for five consecutive years (2013-2017) caused by the high subsidy policy, the national incentive policy has gradually turned to the new energy passenger car market. The impact of subsidy policy changes in 2018 on new energy passenger cars is relatively limited, the subsidies for models with a cruising range of more than 400 km have even risen; while the subsidies for commercial vehicles fell sharply, new energy buses subsidies fell by 40%, and new energy trucks subsidies even has a greater reduction. In the post-subsidy era, the application of specific scenarios is the key to the further development of new energy commercial vehicles. 

Subsidy policy is the most direct and most effective means of stimulating consumption in the early stage of market development, but it is not a long-term solution. The Dual-Credit policy shows that the Chinese government’s management of the NEV market has gradually shifted from the initial incentive mechanism to the monitoring mechanism. In the future, China’s NEV industry will enter a new stage of more openness and marketization, government support will gradually weaken, and market competition will be fair and more open.  

Interact Analysis will review the relevant policies and the impact on the market and enterprises in our China’s NEV market policy database and answer the two questions that customers are most concerned about now: what will be the future policies and regulations, and what will be the effect of these. 

Liberalization of Foreign Shares Impact on Both Local and Foreign players

Since the 1990s, if foreign-funded auto companies wanted to build factories in China, they had to cooperate with Chinese automakers to establish joint ventures, and the share of Chinese automakers must not be less than 50%. Among the existing joint venture car companies, Chinese local car companies have an absolute controlling position. Due to this government policy support, local manufacturers occupied most of China’s NEV market in the past few years (around 90%).

However, in June 2018, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC) issued a new version of the so-called “negative list” that sets out industries where foreign investment is limited or prohibited. Specifically, the auto industry has eliminated the restrictions on foreign-funded shares of NEV companies.

Painful experience to local brands in short term but conducive to the long-term development of the industry

In 2017, NEV sales accounted for less than 3% of total vehicle sales in China, and most models are highly dependent on government subsidies with low-end products occupying the majority of the market. These combined factors have led foreign brands to believe that this market is not mature, and the mass production time of most NEV models have been set around 2020. 

However, with the implementation of strict policies such as “dual credits”, foreign brands need to increase investment in the NEV field. At the same time, the annual sales of new energy vehicles will soon exceed one million units, which means the market has entered a new stage of development. 

It is foreseeable that the liberalization of foreign-invested shares will stimulate many foreign-funded enterprises to increase their investment in China, with the impact on local brands being obvious. In the short term, some local companies will face pains and even be eliminated from the market. However, in the long run, it will help China’s NEV market to introduce more advanced technologies and products and promote the development of the industry. Companies that survived full market competition will promote the further healthy development of the Chinese automotive industry.

Limited benefit to foreign manufacturers in short term but a very positive signal in the long run

On 10th May, the highly anticipated Tesla (Shanghai) Co., Ltd. was registered in Lingang, Shanghai and became the first foreign-owned automobile company in China. However, the establishment of a factory in Shanghai does not mean domestic production. Tesla’s new Shanghai plant is located in the Lingang Free Trade Zone. The models produced here are still imported cars, but are not recognised as a US produced good for trade purposes. During the Sino-US trade war, the new Tesla plant is expected to be exempt from the 25% punitive tariff, but the 15% standard vehicle import tariff is still unavoidable. 

For other foreign OEMs, it is still difficult for them to enter China’s market in the same way. At present, the Chinese government has strict restrictions on the production qualification of automobiles. NEXTEV, a Chinese NEV start-up which has been listed in the United States, also has not obtained production qualification. Their models can only be produced by JAC at the moment. 

Therefore, even if foreign-funded car companies enter China, it is difficult to shake the current pattern of NEV market in the short term. However, considering the huge volume of China’s new energy market, this is still an exciting opportunity for foreign manufacturers.

Related Research: 

“China Manufacturing Industry Output (MIO) Tracker – Industry Insight – Q3 2018”, a comprehensive overview of China’s new energy vehicle market including passenger cars, buses and trucks, also a core deliverable of “China Manufacturing Industry Output (MIO) Tracker –Q3 2018”, which is a new service to keep our clients abreast of important developments in China. Click here  

Electric and Hybrid Trucks, Buses and Off-highway Vehicles – 2018, a quarterly insight service for the electric and hybrid truck, bus and off-highway vehicle markets. The service will provide regular insight, data and analysis on the move toward electrification in medium, heavy and off-highway vehicles. Click here

If you’d like to learn more about these reports or have any questions, please contact us at info@interactanalysis.com 

 

 

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Posted by Maya Xiao

Maya has an interdisciplinary technical background in system automation, renewable energy, and intelligent connected vehicles. She is supporting APAC’s operations and responsible for Interact Analysis’s Chinese industrial automation and NEV research.