China’s plan for new energy vehicles (NEV) in the next 15 years aims to promote the transition from a state-led to a market-led industry. In the eyes of the policy makers, Chinese brands should lead the way and control the domestic market. Whether the plan (in Chinese) will succeed hinges on how the government manages the phase-out of purchase subsidies after 2022.
Issued by the State Council on Nov. 2, The Development Plan for the New Energy Vehicle Industry (2021-2035) leaves no doubt about China’s commitment to NEVs, calling it a “major direction in the transformation of the global automotive industry.”
Jost Wübbeke is a director at Sinolytics, a research-based consultancy focused on China, in Berlin.
In China’s state economy and politically-steered markets, these industry-specific plans play the primary role in setting growth incentives, planning regulations, allocating financial resources, and even building markets.
China’s leaders perceive the NEV revolution as the big opportunity to build strong domestic automotive brands that can dominate the home market and compete in global markets. On visits to the factories of China’s oldest carmaker FAW in June, President Xi Jinping stated that “we… have to raise domestic brands.” China’s “quality brands” should be able to compete equally with international peers, the plan states. This refers to brands such as BAIC’s Beijing Electric Vehicle and Nio. The plan stipulates that China should “reach an internationally advanced level in NEV key technology” by 2035.
Clear focus on battery electrics
China’s policymakers have never officially favored a specific alternative fuel or powertrain technology. But it’s been obvious for more than five years that they prioritize battery electric vehicles—think Byton, Li Auto, Nio, or any other all-electric plug-in car brand. Now, they’ve made it official: The NEV plan highlights battery electrics as “the main force of new vehicle sales”.
The related, but less official, NEV Technology Roadmap, as presented in a publication event (in Chinese) shortly before the 15-year plan by automotive experts close to the state, estimates that battery electrics will account for 95% of NEV sales in 2035.
By contrast, these experts see plug-in hybrid electric vehicles as a bridging technology. The roadmap dismisses hydrogen-based fuel cells as not a serious option for passenger vehicles, but concedes that they will have a distinct niche in the commercial vehicle market.
Transitioning from state to market
A more challenging element of the plan will be the transition from a state-driven to a market-driven NEV industry.
The growth of China’s NEV fleet over the past five years has been impressive. About 4.9 million battery electrics and plug-in hybrids have been sold since 2015. China aims to sell a total of 5 million NEVs by 2020. However, the recent sales surge was to a large degree only possible with the support of massive purchase subsidies from both the central and local governments. The central government wants to eliminate all these subsidies.
The first attempt to ditch them failed badly. In mid-2019, the central government ordered a complete halt to local purchase subsidies and tremendously scaled back national ones, with a target to fully phase out subsidies by the end of this year.
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But lower subsidies caused the sales of passenger NEVs to plummet in the second half of 2019 by 30% year on year. It took the market until mid-2020 to rebound. China lost its status as the largest NEV market to Europe in the first half of 2020, a shock that still reverberates in Chinese public discussion. As Covid-19 also wreaked havoc on the auto market, the government extended subsidies until end 2022, and even allowed local governments to provide temporary subsidies once again.
The new plan clearly takes account of this policy failure and is less ambitious when it comes to NEV sales targets. Early drafts of the plan in 2019 estimated that NEVs would account for 25% of total vehicle sales in 2025. The final plan lowers this target to 20%, and does not set any targets beyond 2025. However, the semi-official NEV Technology Roadmap estimates an NEV market share of 50% by 2035.
Despite these challenges, the plan is still set to phase out national subsidies as soon as possible—and for good reasons. They have become a heavy burden on state finances: Between 2016 and 2018, the government handed over about RMB 21.5 billion ($3.3 billion) for vehicle subsidies.
NEV quota and benefits to replace subsidies
But a lack of subsidies does not mean a lack of state support. Instead, the government is putting its trust in other incentives.
The core instrument to replace the subsidies, as the plan also puts it, is an NEV quota, which has been gradually introduced since 2017. The quota sets a minimum amount of “credits” carmakers have to earn by selling a certain number of NEVs. If they are below the quota, they will have to purchase positive credits from other carmakers that do meet the quota. This puts pressure on carmakers to prioritize NEV sales. The quota is becoming increasingly stringent: NEV credits collected by carmakers must reach 18% of traditional car production and imports by 2023. That will be a challenge for many companies.
The plan also emphasizes a range of local-level benefits such as discounts for battery charging, special parking slots, and special NEV lanes. However, fast NEV registration in first-tier cities is becoming less important as the quotas for registration of traditional vehicles have recently come under fire by authorities and were relaxed by many cities to stimulate car sales.
The experiences of summer 2019 indicate that these demand-oriented incentives and the NEV quota won’t be enough to replace purchase subsidies and create stable NEV market growth. The situation might change as vehicle and battery costs go further down, but the transition to a market-driven demand is still at a challenging stage.
The plan also conceives of substantial consolidation in the coming years.
Following a typical pattern in Chinese industrial policy, the government intensely promoted the growth of the number of industry players during the emergence of the NEV market until 2019. Since then, the government has taken actions to restrict overcapacities and new manufacturing projects. The plan now officially launches the period of industry concentration in a “survival of the fittest” manner, reflecting the government’s ambition to forge national NEV champions.
Climate change and energy consumption
While the plan extensively focuses on industrial development, it puts less emphasis on overarching climate change targets. This is in stark contrast to the active Chinese climate policy and international emission commitments. China has pledged that its emissions will peak before 2030 and that it will reduce its carbon intensity by 60%-65% below 2005 levels by 2030. Recently Xi vowed China would reach “carbon neutrality” by 2060.
The NEV plan neither includes targets for carbon emissions in the automotive industry nor considers life-cycle emissions of NEVs. Nor does it consider targets for the use of green energy in charging. The NEV Technology Roadmap does estimate that the automotive industry will reach its peak emissions by 2028, but this is not a binding target.
While overarching climate goals are missing, existing regulations exert more pressure to reduce emissions, especially through the NEV credits and fuel consumption credits. Energy consumption of NEVs is also increasingly important, especially in the calculation of NEV credits. As battery electric cars are mostly charged with coal power, improving their energy efficiency is one way to reduce their carbon footprint. The plan aims for an average energy consumption of 12 kWh/100km by 2025. This is ambitious by current standards: some Tesla Model S 75 cars consume around 14.6 kWh/100km.
Tackling the sticking points
In sum, the thrust of the 15-year plan is a clear commitment to the development of the NEV industry and to battery electrics in particular. Important instruments such as the NEV quota system developed over the past few years and will become more prominent.
Yet a major question mark remains. There is no effective strategy yet for the post-subsidy phase after 2022. How policymakers will handle this sticking point will determine the success of the plan and the pace of NEV development in China.