China's New-Energy Vehicle Policy – A Turning Point
There has been a global outcry to control GHG emissions and limit temperature rise. Countries around the world are trying their best to achieve targets in this.
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Key takeaways
- There has been a global outcry to control GHG emissions and limit temperature rise.
- In 2021, China produced 3.54 million and sold 3.52 million NEVs.
- How these challenges are approached by the government and how this policy takes shape over time in the future is yet to be seen.
There has been a global outcry to control GHG emissions and limit temperature rise. Countries around the world are trying their best to achieve targets in this aspect. China is no different. It is the largest per-capita GHG emitter. It also has the most coal-fired power plants in the world to meet its energy requirements. To offset these negative contributions, China needs a big plan. Fortunately, its new-energy vehicles (NEV) policy seems to be a major step in the right direction.
To understand the NEV policy, we need to have a background of the “863 program”. This was a plan to promote hi-teach research and development in the technology sector to make China a world leader. Starting in March 1986(hence the name 863), this program was hugely successful. This plan was behind so many goods being manufactured in China and the “made in China” tag being so popular. The goals were to increase R&D and training of personnel for the development of technologies in various fields. NEV was put into the ambit of the 863 program in 2001. In 2009, it was made a dedicated policy.
So, What is the New-Energy Vehicle Policy? #
NEV is a holistic strategy that aims at research and development to produce more efficient and better NEVs coupled with incentives and subsidies to promote more production and uptake by the public. NEVs include:
- BEV – Battery electric vehicle. Runs only on battery.
- HEV – Hybrid electric vehicle. Runs on a combustion engine primarily. The battery assists in increasing the performance. It is recharged through regenerative braking.
- PHEV – Plug-in-hybrid. The battery is charged as a normal EV would; it is recharged while running by the combustion engine. However, in parallel PHEVs, both run simultaneously.
- FCEV – Fuel cell electric vehicle. These are popularly known as hydrogen-powered cars. Fuel cells use hydrogen to produce electricity which in turn powers the motors.
The NEV policy can be divided into two phases, 2009-17 and post-2017. In the former phase, the focus was on the production of NEVs, which were in an R&D phase till then. Almost 10 billion yuan was allocated for this. The goal was to increase NEV sales to 5% of new passenger car sales by 2012. The 2008 Beijing Olympics introduced 500 domestic NEV models. During this time, a limit was put on the number of registrations of combustion engine vehicles in Beijing and a few other cities. This favored purchase of NEV over others.
In the latter phase, priority shifted to the uptake of those vehicles through subsidies and pilot programs. The approach was two-pronged – to increase uptake and, at the same time, keep up the pace of technological development. Thus, a mandatory credit trading system was introduced. It was to be followed by manufacturers and importers. The criteria to qualify for subsidies were stringent to discourage cost-cutting in R&D. The goal was revised to produce 2 million vehicles by 2020 and 20% of all new vehicles produced by 2025. Some technical criteria were also changed. It should be noted that the criteria for being eligible for the dual credit system and subsidy are different. The latter is more stringent. The Chinese Ministry of Commerce, in 2018, announced that the foreign ownership limit on local automakers would be abolished, and restrictions on NEV joint ventures would be removed. This would allow foreign automakers to build EVs in China without making a joint venture with a domestic manufacturer. The original plan was to decrease the subsidies annually and phase them out by 2020, but it was later extended to 2022 in anticipation of a fall in sales due to the pandemic.
How Is It a Turning Point in The Industry? #
Back in 2010, when the smartphone penetration reached 22%, it was a turning point in the smartphone industry for China. Brands like Xiaomi, Huawei, ZTE, etc, started becoming global brands. They are still big names in the smartphone industry, and OnePlus competes with brands like Apple and Samsung. China took the smartphone market by storm in and around 2015. Chinese companies still dominate the smartphone market in many countries. A similar trend is expected to occur in the NEV market.
In 2021, China produced 3.54 million and sold 3.52 million NEVs. According to the Caixin report, car sales were up by 181% from 2020 and exceeded the total of the previous three years. In 2021, NEVs made up 15.7% of the country’s car market. If this enthusiasm continues and the vehicles take 20-25% of the market, an occurrence similar to the smartphone industry is predicted to occur. This can mark a huge turning point in the industry.
Global supply chain issues, chip shortage, and withdrawal of government subsidies are increasing competition among the brands. Still, brands like Tesla, Peng, and BYD increasing their car prices is reflective of their confidence in the market.
What Led to Better-Than-Expected Sales In 2021? #
As mentioned earlier in this article, a lot of cities in China have restricted issuing license plates to internal combustion engine cars to a certain number. However, no such restrictions were kept for NEV cars. Still, NEV cars were a last-resort choice for consumers, and cars were being largely sold to businesses. By 2020, more competitive models of NEV started coming up. These cars provided better features and a similar or better alternative to conventional vehicles. Auto insurance data from the Caixin report shows that 71% of the NEVs sold in 2020 were bought by individual consumers, up 17 percentage points from 2019. In 2021, the share rose further to 77.4%. Cities with license plate restrictions are the top contributors. China has eyed the rural market too. 16 NEV models, mostly with prices of less than 100,000 yuan were introduced for the rural area. Cui Dongshu, secretary-general of the China Passenger Car Association, says," Hybrid cars, with their low cost and no range anxiety — the fear of running out of power on a journey and not being able to find a charging point –, meet the needs of ordinary families as an intermediate product in the transition from fossil fuel cars to purely electric vehicles". More than 80% of 2021 NEV sales were electric vehicles, while 18.2% were plug-in hybrids.
The government of China has spent approximately 150 billion Yuan on the NEV policy. These subsidies are supposed to phase out by the end of this year. A cut of 30% in subsidies has already been done.
The third, and most important reason has been an increase in charging infrastructure. The China Electric Vehicle Charging Infrastructure Promotion Alliance reports more than a 70% increase in charging points by the end of 2021, as compared to 2020. China now has more than 2.617 million charging points. The country added 340,000 public and 597,000 home charging units. Moreover, new home charging points increased by 323.9% from 2020! An increase in home charging means more convenience to consumers and, as a result, more sales.
Conclusion #
The policy has no doubt been a success. The last reported count of NEV was 7.84 million as of 2021 end. This huge sale of NEVs has definitely contributed to reducing vehicular emissions. Through this policy, China has led innovations in NEV technology, charging infrastructure, and even made battery swap stations popular. However, authorities are focusing mostly on home charging stations. But, as many benefits this policy brings, it poses some concerns too.
Considering China’s more than 60% of electricity comes from coal plants, its vision of reducing emissions seems far-fetched. More NEV and more charging stations mean more pressure on the thermal power plants. Moreover, the withdrawal of subsidies adds to its woes. Even though it makes the market more competitive, it may lead to increased costs, affecting the consumer. It can also lead to a reduced pace of innovation, and R&D. Subsidy leakage and local protectionism also remain major administrative concerns. Politicians tend to focus on personal or constituency-wise benefits, jeopardizing the ultimate goal. Recently, some incidents of subsidy fraud have also come to light. These include installing low-quality batteries, reporting false statistics by companies, and assembling poor-quality vehicles instead of NEVs listed in the Directories to sell to their own car rental companies without placing the NEVs into operation. Thus, challenges still remain to what might seem like a humongous and hugely successful policy. How these challenges are approached by the government and how this policy takes shape over time in the future is yet to be seen.
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