BYD, China’s largest producer of electric vehicles, says that recently announced cuts to government subsidies for new energy vehicles won’t impact the industry’s long-term growth.

In a filing to the Shenzhen Stock Exchange (SZSE) on Tuesday, the company said that the reductions will help shift the sector away from being policy driven to one driven by market conditions. BYD filed the disclosure after the company was asked by the SZSE to clarify issues in its 2018 annual report.

“Subsidies will have a short-term impact on demand and the profitability of new energy vehicle makers, but they will not alter the long-term growth trend of the new energy auto industry,” (our translation) the company said.

BYD added that it is difficult to predict the impact of the subsidy cuts on the company’s profits from new energy vehicles.

In March, the Chinese government announced changes to its subsidy structure, saying that automakers rely too heavily on government support to sell vehicles, thereby sacrificing innovation in the sector.

By mid-2019, the government will cut contributions by up to 50% for vehicles with a range of 400 kilometers or more. Meanwhile, those that can travel up to 250 kilometers will not be eligible for an allowance. The cuts mean that automakers will be forced to absorb the costs or pass them on to their customers, both of which could be potentially damaging for their businesses.

The government implemented the subsidy system in 2009 in order to spur growth in the industry. There are now nearly 500 registered new energy vehicle manufacturers in China, prompting concerns that a cull is on the horizon.

“The leading companies are expected to continue to increase market share and achieve faster growth,” BYD said.

The government has also implemented a “cap and trade” system, in which manufacturers producing more than 30,000 electric vehicles per year are required to earn credits equal to 10% of their output. Companies that don’t reach this can be fined. The system aims to ensure traditional manufacturers also produce new energy vehicles while providing a potential revenue stream for smaller players by allowing them to sell excess credits.

Christopher Udemans is TechNode's former Shanghai-based data and graphics reporter. He covered Chinese artificial intelligence, mobility, cleantech, and cybersecurity.

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