Does NEV sector already face overcapacity?
Cost cuts key for producers to survive ‘no subsidy’ age
With the delivery of the first batch of seven-seat electric sport utility vehicles (SUVs) in Shanghai at the end of May by NIO, a representative of China’s rising power in new-energy vehicle (NEV) manufacturing, concerns about overcapacity of NEVs are rising, as shown in recent media reports.
As many entrepreneurs are rushing into the sector, the overcapacity risk is constantly rising, said a Beijing Business Today report on June 4. NEVs include electric cars, plug-in hybrids and other green alternatives such as fuel-cell vehicles.
Some wonder how NEV overcapacity came so soon, since it is a newly emerging sector in China, plus one of the 10 key areas in the “Made in China 2025” initiative.
According to data from the China Automobile Dealers Association (CADA), there were more than 200 NEV projects in the nation from 2015 to the end of June 2017. The publicized planned capacity of various automakers, including the traditional vehicle makers as well as specialized electric vehicle start-ups such as NIO and X-peng, has already exceeded 20 million units.
The figure is 10 times the target for annual NEV output by 2020 as required in the Guideline on China’s Medium and Long-term Car Industry Development, which was jointly released by the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission and the Ministry of Science and Technology last year.
Separately, the Minister of Science and Technology said in 2015 that it expected 5 million NEVs on the roads by 2020.
Xu Haidong, secretary-general of the China Association of Automobile Manufacturers, told the Global Times that “overcapacity” refers to the oversupply of planned or target capacity, not real capacity.
“Designed capacity does not necessarily equate to the actual production capacity in the end,” Xu said.
“NEV makers plan their capacity based on their own observations of the market demand. Some companies that have not yet achieved mass production have still announced big numbers to the public, which might be interpreted as ‘overcapacity’,” said Xu. “The core issue is whether their NEVs can meet the market test in the end.”
Jia Xinguang, executive director at the CADA, told the Global Times that the domestic NEV market is not mature yet since it relies heavily on subsidies, while real market demand still has room to grow.
Starting in 2009, China’s NEV industry experienced robust expansion mainly backed by government support, and it had become the world’s largest market by sales, according to the MIIT.
Sales of NEVs in China grew rapidly, from less than 10,000 in 2011 to about 510,000 in 2016 and then 777,000 in 2017. That latter figure was up 53.3 percent year-on-year, data from the China Association of Automobile Manufacturers showed in January.
Jia Rui, a Beijing-based worker, plans to buy an electric car at the start of next year when he will get the license plate after almost two years’ of waiting in line.
“High prices and ‘mileage anxiety’ are my two major concerns,” Jia Rui told the Global Times. “A two-year wait is long, but that also means producers will have come up with better products, and then I’ll have more good choices next year,” he said.
For Jia Rui, a model costing about 200,000 yuan ($31,234) that offers a 500-kilometer range and can be fully charged within half an hour is a perfect choice.
A white-collar worker surnamed Huang, who already owns a BAIC electric vehicle in Beijing, had similar thoughts.
“I bought my current car at the start of 2016 when there were not many choices. I paid about 100,000 yuan myself after a subsidy that was about 40 percent of its total price,” she told the Global Times.
“Customers want NEVs that are similar to traditional gasolinepowered vehicles in terms of prices, models and convenience,” said Yale Zhang, head of Shanghai-based consultancy Automotive Foresight, noting that high costs are the main reason for the gap between the market demand and the real products available in showrooms.
As far as Zhang is concerned, the NIO electric SUV is a “luxury toy for the rich,” which is priced at 448,000 yuan to 548,000 yuan before subsidies, certainly not for the mass market.
Lower subsidies
Since 2013, China has offered subsidies to support electric carmakers. Data released by the MIIT showed in May that the subsidies totaled 19 billion yuan during the 2016-17 period.
In recent months, however, many NEV makers in China have found that their profits fell even as their sales continued to increase, the Xinhua News Agency reported in May.
Shenzhen-based BYD Co, a leading NEV carmaker in China, registered first-quarter profit of 102 million yuan, down 83 percent year-on-year. The company has estimated that profit will fall by about 71 percent to 83 percent year-on-year in the first half, according to its first-quarter earnings report at the end of April.
BYD said this forecast mainly reflected the phasing out of subsidies, which are set to end by 2020.
In December 2016, several Chinese ministries jointly issued a policy to reduce subsidies for buyers of NEVs, except fuel-cell electric vehicles, by 20 percent off the 2016 standard, effective from the start of 2017.
In February this year, the Ministry of Finance and other four departments proposed a new scheme for subsidizing the NEV sector.
Being effective from June 12 after the four-month transition period, the new rules set stricter technological requirements that will prevail for NEV makers. For example, cars with a range below 150 kilometers won’t qualify for any subsidies, up from 100 kilometers previously. The subsidy for 150-300 km models of pure electric vehicles will be cut by 20-50 percent, respectively, while those with longer ranges will be eligible for higher subsidies.
“As subsidies are gradually phased out, with only two years left, many NEV makers will try to bring down costs to be profitable. They can do this, but whether the reduction will satisfy the market depends on their own efforts,” Zhang noted.
Some companies that are heavily dependent on subsidies will leave the market, he added.
Jia noted that it is only a short-term behavior for NEV players to enter the sector to produce. “Thus these firms will not invest quite much and their real output is not necessary to bring the overcapacity concerns.”