In Depth: Amid China’s EV Boom, Conventional Carmakers Cry Foul

By Zhai Shaohui and Ding Yi

As government support has been pivotal in the meteoric rise of new-energy vehicles (NEVs) in China, some traditional carmakers are complaining that they aren’t competing on a level playing field with their NEV counterparts.

The country’s passenger car industry saw a milestone in July. About 51% of the vehicles sold that month were pure electric cars and plug-in hybrids, which come under the NEV category. That marked the first month ever that NEVs outsold traditional vehicles, according to data from the China Passenger Car Association (CPCA). 

That month wasn’t an outlier. In August, September and October, 54%, 53% and 53% of auto sales were made up of NEVs, respectively.

Since 2009, China has implemented a range of policies to boost NEV consumption, including state subsidies and tax breaks, to reduce fossil fuel energy use, carbon emissions and air pollution. These efforts saw the proportion of NEVs sold rise to 35.7% of all car sales in 2023 from just 6% in 2020, according to the CPCA.

JP Morgan Securities (China) Co. Ltd. expects that number to rise to 80% by 2030 — a 10-point increase over its previous prediction for that year.

People in the traditional automaking industry and other observers have raised concerns that the government’s policy preference for NEVs is not only squeezing profits and sales for conventional carmakers, but also affecting the economic development and employment situation in regions where combustion engine car supply chains are concentrated.

Call for a level playing field

During this year’s session of China’s top legislature, a proposal to promote hybrid EVs (HEVs) was submitted by Feng Xingya, who is both a National People’s Congress delegate and general manager of Guangzhou Automobile Group Co. Ltd. (GAC). (601238.SH -5.61%)

Feng hailed HEVs an “upgraded version” of conventional vehicles that represent one direction for the development of green car technologies. China classifies HEVs as conventional vehicles, as their internal combustion engine is their primary mover with the battery only operating at lower speeds.

In his proposal, Feng pointed out that the growing popularity of NEVs is constraining the market opportunities for traditional cars, forcing their makers to launch price wars — though the NEV market is currently mired in its own price war. This has further reduced profit margins, and at the expense of companies’ shift to electrification.

During an earnings briefing earlier in the year, Feng also predicted that HEV sales would boom in the next two or three years if the government starts treating conventional cars the same as NEVs. HEVs accounted for around a third of GAC’s sales in 2023.

At an industry event in June, GAC Chairman Zeng Qinghong called for the government to stop treating conventionally powered cars differently from NEVs and suggested that policymakers should avoid resorting to a one-size-fits-all approach for the auto industry.

To make his point, Zeng noted that producing the electricity used to charge up NEVs also creates carbon emissions because coal-fired power plants generate nearly two-thirds of China’s electricity. However, a 2020 study by academics at the universities of Cambridge and Exeter in the U.K. and Nijmegen in The Netherlands, published in the journal Nature Sustainability, found that “under current carbon intensities of electricity generation, electric cars (…) are less emission intensive than fossil-fuel-based alternatives” across the majority of the globe, including China.

At another industry event in June, Shen Jinjun, president of the China Automobile Dealers Association, said that policymakers should emphasize research and development, vehicle-to-grid integration and charging infrastructure rather than cash subsidies when making policies to boost NEV adoption.

During an industry forum in September, Fang Haifeng, a senior engineer at the China Automotive Technology and Research Center Co. Ltd., suggested that the time has come for the government to re-evaluate the policies that spurred China’s rapid shift to NEVs, citing emerging risks such as automakers’ declining profit margins and job displacement.

Some traditional industrial chains weren’t able to go through a complete and effective transition during the rapid development of electrification, resulting in mismatches between supply and demand in terms of industry talent and employment, according to Fang.

If automakers experience profit drops or losses from their fossil fuel car businesses because of unfair treatment, it could be a matter of survival for the industry, said the auto industry veteran.

As a counter measure, the veteran also revealed that some automakers and local governments are considering adjusting their auto industry development roadmaps, prioritizing plug-in hybrids over pure electric cars because the fossil fuel car industry chain can also be used for making hybrids.

Unfairness in taxation

Cash subsidies to support the NEV industry’s growth were introduced in 2010 — alongside other support policies such as tax breaks for buyers. On Jan. 1, 2023, the subsidies were completely canceled as sales had exceeded targets.

However, NEV buyers are still exempted from several taxes levied on conventional vehicles. This includes vehicle purchase tax and an annual vehicle tax. Also, buyers of fully electric cars don’t need to pay a tax on fuel, a certain portion of which is used for road maintenance.

It could be argued that this tax exemption is unfair because NEVs also use public roads, said Zhai Jiguang, an associate professor of Civil, Commercial and Economic Law School under the China University of Political Science and Law.

Some local governments have begun questioning NEVs’ contribution to auto-related tax revenues, a branding manager of a traditional carmaker’s NEV division told Caixin. At an industry forum in September, Fang predicted that with the rising sales of NEVs, China’s vehicle purchase tax revenue will drop by 10% by 2025, compared with 2022, with the decrease rate likely to be sharper if the tax exemption policy continues.

What if the tax breaks for NEVs are canceled?

While the 10% vehicle purchase tax typically applies to new fossil fuel cars, it has been waived for clean-energy vehicles since 2014 and the exemption has been extended through the end of 2027.

Ending these tax breaks could pose challenges to NEV-makers.

After the government scaled back its subsidies for NEV purchases in 2019, NEV sales immediately experienced a drop, with some carmakers even forced to quit the NEV sector, said Dong Yang, president of the China Automotive Battery Innovation Alliance. Dong added that the government should take into consideration the consequences when they study whether to treat conventional cars the same as NEVs.

But some industry insiders disagree, saying that the cancellation of tax breaks will lead to the weeding out of underperforming NEV companies, leaving innovation as a major way for them to stay in the crowded market.

Equipping NEVs with smart driving systems and digital cockpits may help NEV-makers withstand the elimination of the tax breaks, according to one McKinsey & Co. survey.

Contact reporter Ding Yi (yiding@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

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