Take away the props holding up China’s electric car market, and it comes crashing down all too fast.
Sales of new-energy passenger vehicles plummeted more than 60% in January, data this week showed. That follows a 300% jump in 2015, and 50% growth last year. The drop isn’t just because of distortions from the Lunar New Year holiday, as is cited for most Chinese data at this time of year. Aggressive scaling back—and redirection—of broad-based government handouts to promote electric cars over the past two years seems to be at play.
The cause-and-effect in China’s electric car market is unconcealed: On Dec. 30, Beijing laid out a slew of changes on new-energy vehicle subsidies as fraud rose. The new policy includes stricter requirements on speed and energy consumption, caps on provincial subsidies, 20% lower subsidies and a delay in subsidy payments between making a car and when cash from the government is collected. For companies like BYD, China’s answer to Tesla, that have been hanging on to these handouts, working capital will look tighter, margins slimmer and operational challenges higher. The new policy just raises barriers-to-entry without supporting sustained development.
The onset of severe withdrawal symptoms also poses a threat to global car makers, who are being forced to make electric vehicles in China over the next five years as the part of the country’s efforts to reduce air pollution. With the electric-car market now slumping, the one incentive for manufacturers—riding a wave of rising sales—has disappeared. Meanwhile, offsetting other component costs and complying with fuel-economy targets becomes difficult.
The faster-than-expected decline comes at a time when car makers globally are investing—in many cases, together—to lower the cost of batteries and increase batteries’ energy density. Earlier this month, Honda formed a joint venture with a Hitachi subsidiary to drive down costs as it targets electric powertrains for two out of every three of its cars in the next decade.
Recognizing the central role of batteries in green cars, Beijing late last year revamped its policy on electric batteries too, effectively shutting out international manufacturers. An attempt to flood the battery market with dated batteries via protectionism could set the industry back years.
With the cost of making cars rising, additional investment in research and development will also begin to look painful. If not used prudently, crutches can be crippling.
