Chinese Car Customers Slowly Switch to Electric

SHANGHAI – Zhou Jiahuan, general manager of a BYD dealership on the outskirts of Shanghai, sells about 150 units a month of the all-electric and plug-in hybrid-electric vehicles the Chinese automaker offers.

The Song plug-in is his best-selling model, Zhou says, because Shanghai residents like to take weekend trips away from the city, and with a PHEV they don’t have to worry about running out of electric “gas.”

The Song’s base price is 169,000 RMB ($25,524). Government subsidies can greatly reduce that price; they range from about $3,000 to $10,000, depending on the vehicle’s electric-only range. Then there’s the free license plate. A limited number of non-EV registrations are auctioned each month in Shanghai and sell for $10,000 or higher. EV owners get one gratis.

“If there was no subsidy, people would still buy electric vehicles,” Zhou tells WardsAuto. “If the free license plate offer goes away, though, sales will really drop.”

China is the world’s largest EV market, a status it has achieved with the help of generous government subsidies and preferential policies. Those subsidies are due to be eliminated in the next few years.

Regardless, automakers looking to do business in China will have no choice but to produce electrified vehicles in ever-increasing numbers due to a combination of government measures.

“OEMs understand they have to push the EV strategy in China, whether they want to or not,” says John Zeng, Shanghai-based director of Asia Pacific forecasting at LMC Automotive.

According to China Association of Automobile Manufacturers data, 507,000 units of so-called new-energy cars and commercial vehicles – battery-electrics and PHEVs – were sold in the country in 2016, up 53% from the prior year. Most were BEVs, sales of which increased 65.1% to 409,000 units, while PHEV deliveries rose 17.1% to 98,000.

Sales of EVs in China, including both BEV and PHEV models, rose 45.4% to 490,000 units in the first 10 months of 2017. Deliveries in October alone were up 106.7% year-on-year.

But 24 million cars were sold last year in China, giving EVs a mere 2% share of the world’s biggest automotive market.

The EV market still is largely driven by government policy, particularly tax incentives, and sales are highly concentrated in cities such as Shanghai, Beijing and Shenzhen.  There, vehicle registrations are rationed and can be very costly – except for buyers of EVs. They get to cut in line and, in some cases, don’t pay any fee.

In Beijing, for example, buyers of a domestically produced EV such as the tiny EC180 produced by state-owned Beijing Automotive Industry Corp., or BAIC, can apply for one of 40,000 free license plates issued to EV owners, says Yale Zhang, managing director of Automotive Forecasting, a Shanghai-based consultancy.

Chances of getting a plate are effectively zero for owners of non-electric vehicles, he says, because there are 800 applicants for every license plate in Beijing’s monthly lottery.  

For EV shoppers, one in 20 gets a plate, Zhang adds. Applicants generally, though not always, wait until they have obtained a plate to buy a car.  

China’s central government supports EV purchases in other ways as well. One is an exemption from the 10% purchase tax. That was to be phased out by the end of this year but has been extended at least through 2020. 

Another way is paying subsidies to manufacturers, which average about $7,500 per unit, says Robin Zhu, lead Asian autos analyst in Hong Kong with investment research firm Sanford C. Bernstein. That government subsidy will be scrapped by 2020, he says.

“It makes sense they extended (the purchase-tax exemption), says Zhu.  “Otherwise it would have been a double whammy for EV economics.”

Produce or Pay

In place of subsidies to automakers, China will turn to a combination of policies aimed at compelling manufacturers to produce EVs or pay a fine. If that sounds suspiciously like the policy in place in California, it should. China will adopt a carbon-credit policy modeled on California’s Zero Emission Vehicle regulation.

That policy will be layered on top of China’s existing Corporate Average Fuel Consumption (CAFC) policy, which mandates that automaker fleets achieve an average 47 mpg (5.0 L/100 km) by 2020, rising to 58 mpg (4.1 L/100 km) by 2025. Automakers who can’t meet that goal will be heavily fined.

“This is a clear road map for OEMs’ technology,” says LMC’s Zeng. “After 2020, you have to electrify your cars in China to meet the target.”

China has hinted at another fundamental policy change: totally banning vehicles using internal-combustion engines. But while there may be more restrictions on non-electric vehicles in the future, China’s regulations won’t be as strict as, say, Europe’s, Auto Foresight’s Zhang believes.

“China is pretty cautious. They say they will consider (a complete ban) – not that we will do it. The auto industry will suffer a lot” if such a ban was enacted, he says.

Despite the tax break and other incentives, Chinese consumers have been reluctant to buy EVs because of a lack of charging stations. That is changing fast. New housing developments must include charging stations, Zeng says, adding stations are being installed at public facilities such as hospitals.

There still is the question of demand once the subsidies vanish in 2020. Demand likely will remain, though perhaps not as robustly.

Cities in China likely will continue to subsidize purchases by offering free registration, Zeng says. Also, the price of ICE-powered vehicles will rise as automakers are forced to pay a penalty for every ICE vehicle produced, he says. That cost will be passed on to consumers. 

The carbon-credits plan won’t be implemented until 2019 to give automakers time to prepare.  

“I think the price itself will shift the consumer away from the combustion engine,” Zeng says.

China’s on-demand and ride-sharing fleets will create a thriving market for EVs in the future, predicts Bill Russo, co-founder and CEO of Automobility, a strategy and investment-advisory firm in Shanghai.

“More people book a car today than own a car,” he tells WardsAuto, “with huge implications for fleet-based mobility services.”

For example, ride-hailing firm Didi Chuxing, which acquired Uber’s China operations in late 2016, plans to deploy 1 million EVs by 2020, says Russo.

Chinese consumers also will have more and more attractively priced EVs to choose from, Zhang says. Both traditional automakers and a bevy of technology firms in China are preparing to launch EVs, he says.

“After two to three years, we will probably see good products, maybe as good as Tesla but at a lower price,” predicts Zhang. He forecasts EVs will account for 15% to 20% of new-car sales by 2025, compared with 2% in 2016.

At BYD Shanghai Zhuojing Auto Sales, general manager Zhou – who drives a non-electric BMW – is not too concerned about the end of purchase subsidies. “In another one or two years, there will be another policy to promote EV sales,” he says confidently.