How China Destroyed its Electric Vehicle Market

The Chinese government has given a major shock to companies selling electric vehicles in the country. China has announced a sudden rollback of the billions of dollars which were being paid in subsidies to makers of electric companies. This sudden move has left many of these companies high and dry. Many of these companies had entered the electric vehicles market because of the subsidies which were being offered by the Chinese government. The knee jerk reaction of the Chinese government only proves what right-wing economists have been saying all along. Right-wing economists have always believed that the best way for a government to help industry is to stay away from it, i.e., laissez-faire policy. The Chinese electric vehicle industry is a classic case of how government meddling can go awry.

In this article, we will try to follow the entire story about why China started offering huge subsidies to the electric vehicle makers in the first place and why later it was forced to pull the carpet under their feet.

China’s Fascination with Electric Vehicles

China has one of the worst levels of air pollution across the world. This has happened because of the rapid industrialization that countries like China have witnessed in the recent past. Because of the extreme pollution that Chinese industries are causing, China has come under international pressure. However, it has refused to accept any policy which would limit the growth of its industries.

Now since China does not want to cut down on the industrial output, it needs to take some other measures to reduce its carbon footprint. This is where the idea of the mass adoption of electric vehicles was born. The Chinese government realised that if it could get its population to start using electric vehicles, the pollution in the urban areas would immediately come under control. This would help improve the health levels of its citizens as well as reduce international pressure.

China’s Old Subsidy Program

Because of the above-mentioned points, China decided to create a national policy which would ensure the mass adoption of electric vehicles by 2025. However, the problem was that electric vehicles are expensive as compared to other vehicles which run on fossil fuels. The technology required to manufacture car batteries is still nascent which makes them prohibitively expensive. This was when the Chinese government realized that it needed to intervene and provide subsidies. This is because left on their own, the electric vehicles didn’t stand a chance against conventional vehicles given the current market scenario.

The Chinese government started providing very high subsidies. On average, the government was paying $10000 for every electric car which was sold within China! Also, the government was even more generous when it came to manufacturing electric buses. The subsidy for every bus sold was around $30000 per bus.

All these subsidies helped the Chinese electric vehicle market gain substantial traction in the short run. Within a short span of time, the Chinese market became the largest market for electric vehicles in the entire world.

China’s New Subsidy Program

The Chinese government has been recently involved in a trade war with the United States. As a result, the state has been looking at avenues to cut costs. This is the reason why China has jumped off the electric vehicle subsidy bandwagon faster than it jumped in.

The Chinese government has spent close to $10 billion dollars in subsidies to electric vehicles in 2018. This number is expected to rise rapidly to $25 billion by 2020 and to $70 billion by 2025. Even though electric vehicles only make up to 4% of the country’s automobile sales, they are resulting in significant losses to the Chinese government.

As a result, Chinese Federal government is cutting the subsidy bill by a massive 50%! Also, local Chinese governments have asked to completely eliminate the subsidy which they were providing to electric vehicle companies. Also, the new subsidies will be provided based on the range of the vehicle. Vehicles which travel less than 200 km on a single charge might not receive any subsidy at all! Also, the Chinese government has vowed to completely eliminate all subsidy by 2020!

Overcapacity: The Chinese government has wrecked the electric vehicle industry. If it had just let the industry grow at its own pace, the industry would have flourished. By artificially lowering the price for some time, the Chinese government ended up creating a supply overhang. There are currently more than 464 different manufacturers of electric vehicles in China. More than half of these manufacturers will simply go bankrupt in the next few years.

Fall in Sales: Given that the subsidies have been drastically reduced, auto companies have no option but to raise prices. This is making them lose their competitiveness as compared to conventional vehicles. There are several companies like Zhongtong Bus Holdings which have seen their sales fall by a massive 40% due to a sudden increase in price. These companies have also seen their net profit decline by 80%. It is only a matter of time before several of these companies become unviable and bankrupt thanks to the abrupt policy changes by the Chinese government.

The bottom line is that governments should not interfere with nascent technologies. All great innovations from electricity to social media have flourished without government intervention. It is best to let markets take their course. Government intervention creates more problems than it solves.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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