While China’s overall auto sales have rebounded strongly following the Covid-19 outbreak, the electric vehicle market cratered with a double-digit decline in May.
New energy vehicles (NEV) sales dropped 23.5% year on year to 82,000 units in May, according to figures from the China Association of Automobile Manufacturers (CAAM), while total auto sales leapt 14.5% on an annual basis. The decline continues a nearly year-long dropoff since Beijing announced in July cuts in EV subsidies of up to 60%. The world’s biggest EV market recorded its first-ever annual decline last year, with 1.2 million units sold.
China’s top industry regulator in 2017 set a 2020 goal of 2 million EVs, to reach 20% of new car sales by 2025. Whether China will be unseated as the world’s biggest electric vehicle market seems unlikely, yet bleak auto sales figures are a stark reminder of the chasm between Beijing’s near-term goals and actual sales.
TechNode’s recent conversations with analysts show a sharp divide on that question as well as their views on government subsidies and consumer demand. Let’s look at their estimates first.
Higher prices, tighter budgets
China’s EV adoption is strongly tied to government incentives. The central government began slashing subsidies by up to 60%, or RMB 27,000 per unit, on electric cars late last June. The market has been on a roller-coaster ride as a result, from 80% year-on-year growth to falling into a months-long slump.
Beijing in April announced that it will extend EV subsidies until the end of 2022 in an effort to stem further collapse, though they will be 10% lower in 2020 than 2019 levels, 20% lower in 2021, and 30% lower in 2022. This means for an EV with a driving range of more than 400 kilometers (around 250 miles), the qualifying subsidy is RMB 20,000 (around $2,820) compared with RMB 55,000 at the peak in 2016—leaving many to doubt its effectiveness.
China International Capital Corp (CICC), however, sees value even in a downsized subsidy, saying in an April report that it will have a calming effect by “stabilizing consumer expectations” (our translation). UBS analyst Paul Gong agreed, adding that additional financial incentives from local governments would help with market recovery.
Still, CICC recently cut its 2020 EV sales forecast by a third, to fall between 1 and 1.5 million units, on account of the shattering blow Covid-19 has dealt to economies across the globe. UBS estimated annual sales will continue at the 2019 level this year, without giving specific figures.
The subsidy crutch
The NEV sector is still not a market that can thrive without subsidies, global consultancy AlixPartners wrote in a recent report. It pointed to weak overall demand for autos amid the lowest annual economic growth China has seen in decades due to the pandemic.
This holds even more true for the less affordable electric car relative to traditional gasoline engine vehicles. The EV price differential is at least $8,000 more than an equivalent model with a gasoline combustion engine, owing to the expense of the car battery. This difference will probably deter Chinese consumers who are now more price sensitive, pressured by higher mortgages and lower incomes, AlixPartners Managing Director Stephen Dyer told journalists on June 9 during an online briefing.
Meanwhile, Bernstein estimates 67% of car sales in China last year came from models with a sticker price below RMB 150,000, “far below the prices of most EVs excluding subsidies,” analyst Robin Zhu wrote in a March report. Cui Dongshu, secretary general of China Passenger Car Association (CPCA), expects that sliding oil prices will make internal combustion vehicles more attractive to customers.
UBS, however, maintained that consumer demand for all autos is recovering as the virus outbreak shows signs of slowing. According to two surveys by UBS Evidence Lab, around 27% of 1,000 respondents from across China expressed their intent to buy cars in April, compared with 17% in February when the number of cases started climbing.
Such latent demand will boost market growth in the following months, making up for the loss in sales volume in the first six months of this year, analyst Paul Gong said at a media event on June 4. The year-on-year growth rate could be “pretty positive” in the coming months given the low base in the second half of 2019, and as competitive EV models enter the market, he added.
JP Morgan analysts also expect EV market penetration will continue. The cost of compact EVs is expected to reach parity with that of conventional vehicles as early as 2021, and larger EVs with bigger battery packs in 2024.
Competition for share
“All OEMs—foreign and local—are pushing out new models to the market to grab shares in this rapidly growing opportunity and at the same time comply with China’s strict emission requirements,” JP Morgan analyst Nick Lai wrote in a report.
Still, analysts expect Chinese EV brands will face more intense competition as foreign automakers accelerate local production in China. Tesla continues to expand its Shanghai plant and Volkswagen is eyeing the market with two jumbo investments.
Tesla has cemented its position as a market leader by delivering 11,095 China-made Model 3 vehicles in May, making it the top-selling EV model for the month, according to CPCA figures. Tesla challengers Nio and Xpeng Motors countered with new models to be delivered later this year.
Meanwhile, local EV major BYD made a big move, launching in March its new blade battery with 50% higher energy density and a 30% reduction in battery cost. Bernstein and Credit Suisse expect BYD’s profitability will improve on a sequential basis, as the local EV major will soon begin mass production of the battery as well as deliver the “Han,” the first EV model equipped with the battery, in mid-2020.