By Zolzaya Erdenebileg

China now outranks the United States in one more category: sales of new-energy vehicles (NEVs). In 2015, China produced and sold more than 300,000 NEVs, a more than 300 percent annual increase, according to  the China Association of Automobile Manufacturers (CAAM).

Other areas of the industry are almost as dynamic: battery electric vehicles (BEVs) totaled almost 250,000 units during the same year — an increase of more than 400 percent — and plug-in hybrid electric vehicle (PHEV) sales totaled more than 80,000 units, increasing almost 200 percent.

As China’s NEV sales skyrocketed, US sales slowed in response to dropping oil prices. NEVs, which here refers to all-electrics, plug-in hybrids, and hydrogen fuel-cell vehicles, is one of the key industries that China will foster for at least the next five years as China continues to push green development

Government support

At the Fourth Session of the 12th National People’s Congress in March, Premier Li Keqiang outlined the major energy for the county over the next five years, which includes reducing the number of inefficient energies and vehicles, and also creating advantages for energy-saving technologies. At the event, Li said 3.8 million old or high-emission vehicles would be eliminated from the roads.

In addition, Li announced China will increase support for policies that encourage the use of energy-saving and environmentally friendly advanced technologies and equipment. In particular, the government wants to improve efforts to develop and promote NEVs. Under the new Five-Year Plan, total production and sales volume of NEVs should reach 5 million by 2021. Construction of parking and charging infrastructure are expected to follow.

And, the government plans to lead by example. In May 2016, the National Government Office Administration (NGOA) announced that more than half of new vehicles owned by China’s central state department will be NEVs within the next five years.

Policy incentives

The government is using a multilateral policy approach to create better conditions for the competitiveness of NEVs. This includes macro strategies, such as energy development and pollution control; infrastructural development to introduce more charging stations; industry management through stimulants for rapid technological innovation; and tax and subsidy incentives for the consumers.

Many of these policies are already in place. Early in 2009, the government introduced a pilot scheme called “Ten Cities, Thousand Vehicles,” which required each of the 10 cities to deploy 1,000 NEVs. As a result, most of the newly deployed NEVs were local government vehicles, such as city buses, taxis, and garbage trucks. Following the success of the program, the central government introduced purchase subsidies for Shanghai, Changchun, Shenzhen, Hangzhou and Hefei. In these cities, car buyers could receive subsidies of up to RMB 60,000 per vehicle for BEVs and RMB 50,000 per vehicle for PHEVs.

In addition to subsidies, electric vehicle (EV) owners benefit from preferential traffic treatment. Many large cities restrict cars during rush hours to combat traffic jams and air pollution. In Beijing, cars with odd and even license plates can only drive on alternate days. EVs, however, are exempt from this rule. EV owners are also exempt from having to partake in the painstaking and expensive process of obtaining a license plate.

In the latest move to boost its electric vehicles industry, the State Council built upon those parameters and reiterated the need for greater R&D and technological development, as well as more incentives for private users during its February executive meeting.

Tax incentives to encourage New Energy Vehicle buyers

In practice, the government’s repeated encouragement of the NEV market resulted in a number of financial advantages for consumers that include:

  • Consumption tax: Under the Regulating Passenger Vehicle Consumption Tax Policy, purchases of battery and fuel-cell electric (FCEV) passenger vehicles are exempt from consumption tax.
  • Purchasing tax: Between September 1, 2014, and December 31, 2017, purchases of BEVs, PHEVs, and FCEVs are exempt from purchasing tax.
  • Vehicle Registration Fee: On May 7, 2015, the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and the MIIT announced that the vehicle registration fee for NEVs would be reduced by 50 percent.
  • Import Duty: NEVs imported for self-use are exempt from import duties. NEV products also get provisional preferential tariff rates (such as for EV inverter modules, moto controllers, vehicle-mounted charges, power brakes, and lithium-ion power batteries).
Foreign investment policies

Despite these substantial subsidies and tax incentives, the NEV market has so far failed to meet expectations. According to CAAM, NEVs made up only 0.9 percent of market share in China. One obstacle is the number of charging stations available,which is a strong disincentive for potential buyers. The other major issue is the battery, which is expensive and unreliable. To advance the battery’s potential, the government has made NEV technology an encouraged product for foreign investment and import.

The Catalogue of Industrial Guidance for Foreign Investment (amended in 2015),which lists the industries that are encouraged for foreign investment, include these components of NEVs:

  • Energy power battery (energy density of 110Wh/kg or above, cycle life of 2,000 or more times, and foreign investment proportion of not more than 50 percent), positive materials of battery (specific capacity of 150mAh/g or above, cycle life of 2,000 times which is not less than 80 percent of the initial discharging capacity), and battery separator (with thickness of 15-40μm and porosity of 40-60 percent).
  • Battery management system, motor management system, electronic integration of electric cars.
  • Drive motor for electric cars (peak power density of 2.5kW/kg or above, high efficient area: 65 percent, and working efficiency of 80 percent or above), DC/DC for vehicles (input voltage of 100V-400V), high power electronics (IGBT, voltage level of 600V or above and current of 300A or above).
  • Plug-in hybrid electromechanical coupling drive system.
Major players

China’s NEV market leader is Build Your Dreams (BYD), a Chinese car and battery maker based in Shenzhen. In 2015, BYD sold over 60,000 vehicles with plugs, making it the largest producer not only in China, but in the world. In addition to passenger cars, BYD has seen success with electric busses, which can be found in more than 160 cities worldwide.

Tesla Motors sold about 50,000 cars in 2015. Its China expansion has been slower than expected, with the company delivering 3,025 units by the third quarter of 2015. While domestic producers enjoy subsidies and preference from the government, foreign companies have struggled to gain a foothold. Other foreign players include BMW, Ford, General Motors, and Nissan, all of whom see China as a key market.

However, a number of well-staffed and well-funded startups are aggressively looking to enter the market. Faraday Future, founded in 2014, is a California-based, China-funded company. At the 2016 Beijing Auto Show, it introduced the Le SEE (Super Electric-Eco System), a mix between a car, an entertainment center and a living room. NextEV is another newly-founded, China-funded company with bases all around the globe. There is also Atieva, whose shareholders include Beijing Automotive (a partnership between Mercedes and Hyundai in China) and the owner of Faraday Future, Jia Yueting. Future Mobility Corp, founded just this year and backed by Tencent Holdings, has already hired the core development team of BMW’s i3 and i8 models.

Looking ahead

Due to the number of new entrants and 2015’s encouraging performance, Miao Wei, the head of MIIT, predicts sales will more than double in 2016. “I believe the industry will continue to grow with upward momentum as the government is also adamant in supporting it with policy incentives,” Miao said.

Yet, the industry is undergoing change as allegations of subsidy fraud surface, and as the government peels away policy support. In April 2016, BYD was suspected of falsifying information to receive additional subsidies. A central government investigation into whether carmakers have abused the subsidy program launched in January and 90 automakers in 25 provinces and cities that received subsidies between 2013 and 2015 are under scrutiny.

China’s Finance Minister said subsidy-related fraud would be punished severely and criticized NEV producers for overly relying on government support. In May 2015, the Ministry of Finance announced plans to cut NEV subsidies by 20 percent between 2017 and 2018 from 2016 levels, and by 40 percent between 2019 and 2020. By doing so, the government hopes to force Chinese producers to innovate and compete internationally.

 

This article was first published on China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.For inquiries, please email us at [email protected]

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