China sees dark side of EV subsidy policy

By Cameron Perks
Published: Wednesday, 05 October 2016

The Chinese Ministry of Finance has punished five companies this month after wrongfully receiving a collective 1.01 billion yuan ($151.25 million) in subsidies in 2015.

The 1 billion yuan in subsidies came from the central government in order to promote electric vehicle (EV) manufacturing in China and bring the country closer to its goal of having 5 million new energy cars on the road by 2020.

The investigation, which was launched in early 2016, looked at ninety major manufacturers throughout China. Of the ninety, five were found to have defrauded the Chinese Government; Suzhou Gemsea, Higer Bus, Wuzhoulong Motors, Chery Wanda Bus and Shaolin Bus had claimed wrongfully that they had sold 3,547 vehicles in 2015. 

Gemsea Coach, a Suzhou, China-based bus maker, had their auto-making production license revoked and was ordered to pay back all of its subsidies received last year. Gemsea was the worst of the offenders, having received 261.6 million yuan ($39 million) in financial assistance for 1,131 vehicles.

The other four companies have been ordered to return their subsidies in addition to being fined an unspecified amount.

The companies - which were found to have unsold or unfinished vehicles, or vehicles that were sold cheaply for teh sole purpose of collecting subsidies -  have also been disqualified from 2016 government funding. 

Repercussions

While the generous subsidies sparked an EV manufacturing gold rush in the country, as well as a sharp spike in demand for battery related minerals, such as lithium, the question of whether the benefits outweigh the drawbacks remains to be answered.

The spot price of lithium carbonate in China rose sharply from Q3 2015 to Q2 2016, driven in a large part by the flurry of enthusiasm around EVs. Prices of around $7.7/kg in July 2015 had increased to $26.8/kg by June 2016.

But the knock-on effect of China's subsidy clampdown has since caused them to stall and then decline steadily, reaching an average of $19.6 in September.

Buyers and sellers on the lithium market are currently looking to hammer out 2017 contract deals, which participants believe will be up considerably on this year's levels, dragged up by Chinese demand. 

The subsidies have been blamed for attracting the 'wrong crowd’ according to Chinese market commentator and auto-analyst based in Beijing, Zhang Zhiyong. Zhang believes the subsidies have attracted companies that are only in the industry for the generous subsidies. Zhang believes that the subsidies should be scrapped, which "will help to clean the sector."

Stella Li, senior vice president for Berkshire Hathaway Inc.-backed BYD, a Chinese manufacturer of automobiles and rechargeable batteries, said that the guilty companies have "disturbed the right market order".

"Bad money will drive out good," said John Zeng, an analyst at LMC Automotive in Shanghai. "A few rotten apples are going to spoil it for everyone."

The future

The scandal has sparked China to reassess their subsidy program, which was due to be phased out by the end of 2020 regardless.

Subsidy methods are to become more diverse, according to Mo Ke, chief analyst at RealLi Research, said at the 2016 Argus Battery Metals Conference in September in Beijing. Mo Ke told delegates of a procurement subsidy program or preference system that assessed individual projects and subsidized those directly.

Mo Ke also told delegates that subsidy barriers will be raised gradually so as to draw down state fiscal funds at a less rapid pace. 

He added that the goal of China’s EV policies in 2013-15 was to allow company growth, overseeing a sharp increase in annual output of special EVs in China. Mo Ke now believes the policy is shifting to force companies into growing their technological and manufacturing capabilities.

In addition, Dong Yang, executive vice-president of the China Association of Automobile Manufacturers, said the government wants to limit the number of carmakers dedicated to new energy vehicles to 10.

This consolidation may make regulating the growing industry much easier, at the expense of shutting out smaller EV manufacturers, entrepreneurs and start-ups.

The consolidation and change of pace in EV policies will also allow the government to reassess the balance between energy density and consumer safety risks.

Once a balance has been achieved and safety measures have been proved effective, China will then be free to research and develop the 300Wh/kg batteries they are striving to achieve by 2020.

For more information on the raw materials used in the lithium-ion (Li-ion) battery industry see IM's new Battery Price Report.