Nio, the darling of China’s electric vehicle (EV) industry, appeared to teeter on the edge of bankruptcy for months. With no major investments, the company was set for disaster as global markets began melting down over Covid-19. But Nio turned out to have an ace in its pocket: the government.
The company is not alone. China’s government is fighting an uphill battle to keep its electric vehicle (EV) industry afloat. But authorities are now pulling back from an effort to wean the sector from state support.
EV sales in China have plunged after the central government cut subsidies by up to 50% in June. The impact of these cuts was swift and severe. Sales of new energy vehicles (NEVs) dropped by 7% year on year to 8,000 cars in July following growth of 80% in June, marking the first fall in more than two years.
Overall vehicle sales in the country during peak buying season—known as “Golden September” and “Silver October”—did little to boost deliveries. In January, sales plunged by more than half to 44,000 vehicles compared to the same time a year before.
But things were about to get worse. The government had no way of predicting that in just a few months its already flagging EV sector would suffer another major hit when a new flu-like virus began circulating unabated at the turn of the new year.
The virus, coupled with sink-or-swim measures to drive EV companies to innovate, could have devastating effects on EV makers this year.
Bottom line: The government wanted to remove the training wheels from its electric vehicle industry, cutting subsidies and pulling back support, but its plan has backfired and 2020 could be the industry’s worst year yet.
- The China Association of Automobile Manufacturers (CAAM) was expecting a bad year before the virus, and it’s got even worse. In late December the organization forecast zero EV sales growth for the year, and since the virus, it’s warned of a further drop of 25% for the first half of the year in a best-case virus scenario.
- Regulators and city governments are now reintroducing support for the industry. In some cases, local authorities have offered to bail out troubled automakers as the sector reels from the dramatic slowdown in sales.
Playing catch up: China was late to car production, lagging behind the US, Japan, and Germany in building gas-driven cars. But the Chinese government saw EVs as an opportunity to catapult itself into pole position to become the driving force behind electrifying mobility.
To achieve this, authorities created incentives for automakers to produce electric vehicles, eventually leading to a regulatory bubble that bred nearly 500 EV companies in the country.
- In 2009, the government introduced subsidies for EV buyers in China to encourage adoption of NEVs, spending more than $60 billion.
- The average subsidy was around RMB 60,000 (about $8,500) per vehicle.
- The government also extended support to companies that produce batteries—the most expensive component of an EV. China is now home to two of the world’s biggest battery makers, CATL and BYD.
- Authorities also began giving away license plates for these kinds of cars, waiving fees that add significantly to the price of purchasing gas-driven vehicles.
- The government support created fertile ground for new EV startups—including Nio, which was founded in 2014.
Poor product: Even with subsidies, Chinese consumers have proved suspicious of electric vehicles. Nio hasn’t been immune despite its legions of loyal fans. The company’s sales are still far from being able to support its business.
- In interviews, car buyers have expressed concerns over the range, safety, and battery life of EVs. Subsidies may have offset some of these concerns in the past, but government cuts have made these vehicles a far less attractive proposition.
- Apart from fires, battery performance has car owners complaining that EVs aren’t living up to automakers’ promises. Several taxi and ride-hailing drivers TechNode has spoken to said that the batteries underperform, especially in winter, when they see a drastic decline in performance.
- This makes range anxiety a significant concern for taxi drivers as well as general car buyers. EVs typically perform better on urban roads, where, unlike traditional gas-driven cars, they use less energy. On highways, range can decrease dramatically, especially when driving at speeds in excess of 100 km/h.
And dangerous: Safety questions have further hurt consumer confidence. Nio, the poster child of China’s EV sector, last year recalled nearly 5,000 of its flagship ES8 SUVs over a battery fault. At the time, the number made up around a quarter of all its vehicles sold.
- The cost of the recall was huge. Nio spent around RMB 340 million in a bid to ease fear and anger from its customers, according to its 2019 Q2 results. This caused an 8.8% quarter-on-quarter increase in costs of sales to RMB 2 billion over the three months ended Jun. 30.
- Nio wasn’t alone. Tesla and BYD owners also reported fires in China, while videos of burning cars make their way around social media.
Sink or swim: Seeing these problems, authorities decided that EV companies were not innovating fast enough, instead relying on government support to sell their vehicles. The government started scaling back support last year, hoping that competition would force EV makers to address the public concerns and develop Tesla-beating batteries.
In June, the subsidy system saw dramatic cuts, and, at the time, the government hoped to phase them out entirely. Nio and other EV makers were forced to make a difficult decision—absorb the costs or pass them on to their customers.
- EVs with a range of 400 kilometers or more saw subsidies cut by half. Meanwhile, cars that can only travel 250 kilometers on a single charge no longer receive a subsidy.
- Local governments also did away with their own financial support systems, instead diverting the funds to EV charging infrastructure.
- The scale of the cuts had many alarmed—subsidies were reduced by up to 70% in some cases..
- Regulators also raised barriers for new EV makers, as a quick fix to the bubble created by earlier support. Companies that want to outsource manufacturing of their EVs, a popular model used by Nio and other firms including Xpeng, must have invested at least RMB 4 billion in R & D over the past three years.
- To encourage competition further, China opened up its automotive sector to the world, scrapping foreign ownership limits on companies that make NEVs, allowing companies like Tesla to run wholly-owned subsidiaries in China.
The fallout: But the subsidy cuts backfired, and apprehension over buying EVs increased. This, coupled with the economic uncertainty from the US-China trade war meant that the EV market took a dramatic turn for the worse. A month after the cuts, Nio’s sales plunged by more than a third, with ES8 deliveries plummeting by 80% to 164 vehicles.
- The overall EV market has seen consecutive declines over each of the past six months.
- China’s NEV sales recorded its first-ever annual decline to 1.2 million units in 2019, down 4% compared to the year prior. In December, deliveries dropped by nearly 30% year on year, a smaller decrease compared to previous months. Following a historical low in during the Spring Festival holiday, sales fell by a further 77% to just 11,000 vehicles in February.
- More expensive cars and a weakened economy also mean Chinese consumers have less buying power.
As if it weren’t bad enough without a pandemic: As China worked to get the Covid-19 outbreak under control, cities were brought to a standstill and whole industries shut down. On Jan. 23, just weeks after the virus was first reported in Wuhan, the city was locked down. The measures quickly spread across the country and authorities extended the Lunar New Year holiday, forcing automakers to shut their factories.
- Experts say the Covid-19 pandemic will now have a devastating effect on China’s EV market. Analysts from US investment bank Jefferies predicts that vehicle sales in China could decline by as much as 10%.
- Meanwhile, Robin Zhu, analyst at asset management firm Bernstein said in a note that he expects “high single-digit” declines in the auto sector as a whole.
- New electric vehicle manufacturers including Nio have had trouble keeping afloat as the company struggles to sell vehicles. CEO William Li said this week that its management team has significant concerns about its capacity to sustain operations over the next 12 months due to financial constraints.
- The company has already cut thousands of jobs to deal with the mounting pressure, and, until recently, had a hard time raising fresh funds.
- Bernstein analysts estimate that Nio could only have enough cash to support itself until the second quarter, making a cash injection. The EV maker also said in its fourth-quarter results that it doesn’t have enough capital to get it through the next 12 months.
U-turn: The dramatic decline in the electric vehicle market has led the government to rethink its approach. Authorities appear to have realized that scaling back support may have been premature and it was unwise to let the industry go it alone. But for Nio, a little help selling cars wouldn’t save the company—it still loses money per car. It needs investors to make payroll.
- In January, before authorities lost control of the outbreak, Miao Wei, Minister of Industry and Information Technology (MIIT), said that Beijing would suspend its plan to completely remove EV purchase subsidies this year.
- The government looks unlikely to increase subsidies at a national level, opting rather to freeze them as they are.
- The move is aimed at calming the market and preempting bankruptcies among EV firms.
Local rescue: As Nio looked bound to fail, a local government stepped in. The eastern Chinese city of Hefei saw its chance to raise its own profile while bailing out the poster child of China’s EV market. The near-complete deal will see Nio moving its China headquarters to the city, where it manufactures its vehicles in a partnership with state-owned automaker JAC.
- A number of cities in the southern Chinese province of Guangzhou, as well as China’s central Hunan province, said in early March that they would reintroduce subsidies to boost consumption.
- Nio in late February revealed a major financing project set to close in April worth more than RMB 10 billion with the government of Hefei, a city in eastern China. The investment may be enough to bring Nio back from the brink, and it without it, the company most likely would have faced insolvency.
What’s next? EV makers face compounding issues. Aside from a months-long sales slump, these companies now have to contend with the fallout from Covid-19. The virus not only means that companies won’t hit their production targets, but that Chinese consumers will have less spending power over the next few months as a result of the epidemic.
China won’t allow its electric vehicle industry to fail. The government will continue to adjust its policies to ensure success and support the industry, as well as the companies that represent it. Nio’s bailout is just the tip of the iceberg and recent policy changes could foreshadow renewed government support going forward.
The government is already taking additional steps to aid its ailing EV industry. In a recent guideline issued to boost consumption in the country, the central government underlined its efforts to provide financial support to drive EV adoption, as well as rolling out a wider network of charging infrastructure.
Nio claims that it needs just three months to start making money per car. If it’s right, maybe all it needs is more time to turn things around—but its path to sustainability is reliant on getting people to buy its cars, which right now, might be a hard sell.