Aileen Kearney, an APCO intern in Shanghai, co-authored this piece.
In September 2020, President Xi Jinping declared that China would be carbon neutral by 2060. This goal has provided fresh impetus to accelerate the development of China’s New Energy Vehicles (NEV) industry. For foreign players looking to enter or expand into China, how will China’s future NEV plans alter the market and impact business strategies?
China already boasts the largest NEV market in the world and is home to a diverse ecosystem of “start-up” manufacturers, such as Nio, Xpeng, and Li Auto, alongside more traditional players, like BYD. Moreover, many foreign brands increasingly prioritize growth within the Chinese market. Tesla, for example, has been rapidly expanding in China since the government lifted foreign ownership restrictions on NEVs in 2018. However, it has long been acknowledged that Chinese NEV demand is artificially bolstered through generous subsidies which analysts fear could dampen innovation and lead to anti-dumping tariffs abroad.
To combat this, China has reduced 2021 subsidies by 10% on NEVs used in public services (e.g. public transport) and by 20% on all other NEVs, choosing not to cut subsidies completely until 2022 because of COVID-19. In addition, subsidies can only be applied to NEVs with a base price of RMB 300,000 and a driving range of at least 300km. The cuts, which are essential for encouraging quality development and positive sector consolidation, have sparked a range of ambitious development plans which foreign companies must stay on top of.
China’s New Energy Vehicle Industry Development Plan (2021-2035):
In November 2020, China unveiled its new development plan for the NEV industry. The aim is for NEVs to account for 20% of all new vehicle sales by 2025 and, in some key areas like national ecological civilization pilot zones, for NEVs to account for at least 80% of new vehicles in the public sector from 2021 onwards.
The plan also reveals a shift in focus towards investment in infrastructure and R&D. Alongside pledges to intensify research into key technologies such as vehicle operating systems, the government also committed to supporting the construction of public battery exchange and charging stations which will make NEVs more attractive to consumers by expanding the charging network. Meanwhile, R&D efforts, particularly in the area of batteries, could ultimately lower the cost of NEV models. While several foreign EV manufacturers have already set up joint ventures to capitalize on the shift in priorities, domestic firms are also positioned to benefit from the changes. For example, the Plan’s support for the development of battery swapping stations directly benefits Nio, who launched an NEV Battery as a Service (BAAS) subscription model in August 2020.
The Dual Credit Policy:
To bolster NEV sales without using subsidies, in 2017 the government introduced its dual credit policy. The policy forces car manufacturers to generate “new energy credits” by ensuring that NEVs account for a specified proportion of their sales. If manufacturers fail to meet quotas, they must buy surplus credits from other companies. The 2021 quota is 14%, rising to 16% next year.
Higher quotas increase the number of NEVs on the market, inducing market saturation and forcing manufacturers to compete to make sales. Faced with this reality, both domestic and foreign NEV manufacturers are looking to differentiate their brands using a variety of strategies from longer-lasting batteries to next-generation autonomous driving software.
Other Localised Policies:
Local governments, concerned by their carbon emission and air quality targets, are also attempting to boost NEV sales through favorable policies. Vehicle registration incentives have been met with considerable success in China’s Tier One cities while trials of usage subsidies, reduced parking fees, and road access incentives are also taking place. During the pandemic, 10 cities released new incentive schemes to bolster NEV sales such as Guangzhou, which offered an extra 10,000 RMB subsidy on NEV purchases.
Future Challenges and Opportunities for Foreign Companies:
- Adapting to the new subsidies: The subsidy adjustments have directly impacted NEV manufactures, with Tesla choosing to lower the base price of its Model 3 to qualify for support in 2021. Companies may have to find new ways to lower the prices of NEV models intended for the Chinese market in order to buoy consumer demand.
- Adapting to increased competition: As the dual credit policy demands that NEVs account for 14% of manufacturers’ sales in 2021, companies will need to innovate to ensure their NEV models stand out from the crowd, especially as demand for NEVs may reduce this year because of subsidy cuts and the pandemic. Investing in developing autonomous systems, batteries, charging stations and cost-cutting technologies are just some of the ways that brands can differentiate themselves in the changing environment.
- Investment in R&D: As the Chinese government has pledged to strengthen investment in domestic R&D efforts, foreign companies should consider collaborating with Chinese partners to develop new NEV models and technology suitable for the local Chinese market. An example would be SAIC-GM-Wuling, which produces China’s lowest priced and current best-selling NEV.
- Expansion of the charging network: Government support for the construction of public battery exchange and charging points presents a substantial opportunity for firms capable of providing expertise in charging point solutions. Investigating potential collaborations in this area, such as the ones BMW and Dongfeng have respectively established with State Grid, could prove fruitful for companies positioned to add value in this area.