Offering key incentives, China is leading the EV revolution with a market for battery-powered vehicles that is already the largest and is growing fast.
A close look at how China got here.
To curb emissions and trim costly oil imports, Finance Minister Nirmala Sitharaman unveiled fiscal incentives for electric vehicle (EV) buyers and a favourable regulatory environment for the nascent industry in the budget.
To push the adoption of EVs, she announced a rebate of up to Rs 1.5 lakh for the buyers on interest paid on loans to purchase the vehicles, with benefit of up to Rs 2.5 lakh over the entire loan period. To lower the cost of manufacturing for the industry, she announced customs duty exemption on lithium–ion cells, most of which are imported from China. Income tax exemption and indirect tax benefits were announced for the makers of critical EV components like solar electric charging infrastructure and lithium storage batteries.
The second phase of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles scheme, or FAME-II, has also been implemented with an outlay of Rs 10,000 crore. Under FAME-II, the government wants to use incentives to push the adoption of electric buses, three- and four-wheelers, and those with sizeable lithium-ion battery. It plans to spend Rs 1,000 crore for setting up EV charging stations under FAME-II.
While it is too soon to assess the effect of these policies, efforts made in the past have not had much effect. Resistance from conventional vehicles makers, who have just started recalibrating their products to meet the Bharat-VI emission norms, is one of the major reasons why manufacturing of EVs has made little progress in India. At best, carmakers appear to be interested in moving slowly.
But at a plant in China’s Shenzhen, home to BYD, the world’s biggest electric carmaker, an EV rolls off the production line every 90 seconds.
To gauge the scale of production of EVs — both battery-equipped and plug-in hybrids — in China, consider these statistics: In the first five months of 2019, around 464,000 EVs were sold in China, up nearly 46 per cent from the same period a year earlier. Out of all the vehicles sold in the country in May, the last month of this period, 5.4 per cent were electric. In 2018, around 1.4 million EVs were sold in the country, growing 62 per cent year-on-year. The number of EVs sold, and the share of EVs in the total vehicles sold in the country, has been rising, having outpaced the rest of the world since 2015. Of the nearly 5 million electric passenger cars in the world in 2018, around 45 per cent, or 2.3 million, were on Chinese roads, up from around 39 per cent in 2017.
Undoubtedly, China is leading the EV revolution with a market for battery-powered vehicles that is already the largest and is burgeoning fast.
But how did China get here?
Incentives Make EVs Attractive Both For Users And Industry
The growth of the EV industry has largely been driven by the incentives provided by governments. Financial incentives, such as subsidies and tax exemptions, are an important tool for decreasing the upfront costs of such vehicles, which, in turn, encourages adoption of the technology.
China adopted this strategy quite early, introducing subsidies in 2009 ranging from around $4,800 to $8,300 for battery electric vehicle (BEV) and around $4,800 for plug-in hybrid electric vehicle (PHEV). Subsidies are based on the driving range of a vehicle, and increase as the range grows. In addition to these subsidies offered by the central government, local governments also pitch in.
In 2016, BYD, largest EV maker in the country, received around $1 billion in subsidies, which made up a fifth of its $5 billion earnings from EV sales.
China also offers tax rebate on the purchase of clean-energy vehicles, which include both BEVs and PHEVs. At 10 per cent, this exemption is significant.
According to the Center for Strategic and International Studies, a Washington-based think tank, the central and local governments of China have spent at least $58.8 billion in subsidies and tax breaks to manufacturers and users of EVs.
Apart from financial incentives, in many large Chinese cities, such as Shanghai, Beijing, Guangzhou, Tianjin, Hanghzou and Shenzhen, where air pollution is a major problem, EV owners get special privileges. While conventional vehicle owners are restricted from purchasing new cars, EV owners are exempted. Vehicle buyers in some cities have to wait for a random draw to get a licence plate. For example, in Beijing, the chances of getting a new licence plate is as low as one in 1,907. In 2018, the number of new plates issued was limited to 100,000.
But for EVs, chances stand at one in four. In other cities, the chances of getting a licence plate for EVs are even better. Additionally, a licence plate for EVs in China costs a fraction of what one may spend on getting one for a conventional vehicle. Moreover, in these areas, EV owners are also exempted from some driving restrictions. Thus, EVs become more attractive.
Not All Carrots, There Are Sticks Too
One, the Chinese government has prohibited investment in new internal combustion engine vehicle production plants. Therefore, established carmakers in the country and even foreign entities who want to invest in China will have to go for EV production.
Two, China has now adopted a California-style zero emission vehicle mandate, under which, in 2019, a carmaker which produces 30,000 vehicles or more will have to get ‘new energy vehicle’ credits equal to at least 10 per cent of its sale of conventional or fossil fuel using cars. The credit requirements will rise up to 12 per cent in 2020, and the industry expects the credit level to grow fast.
Of course, this does not mean that one-tenth of all vehicles produced by a company should be EVs. The requirement in terms of number will be lower as credit will be awarded based on factors such as the distance an EV can cover on a single charge. According to Bloomberg, the least eco-friendly car will fetch a credit score of two while the most eco-friendly one may get carmakers six credits. Therefore, score will depend on the quality of EVs a carmaker manufactures, thus also incentivising quality.
Companies that fail to meet the credit requirement can either buy credits from those who manage to exceed their credit requirement or face penalties such as no approval for new models or production halts for petrol cars.
For carmakers in the country big on fossil fuel vehicles, many of which are not Chinese, there is no option but to invest in EVs. For example, Ford has tied up with Zotye Auto, a Chinese carmaker, to build small EVs for the Chinese market. This tie-up has already led to an investment of $800 million. Similarly, another foreign player in China, Volkswagen, has tied up with Chinese EV-maker JAC Motors. BMW is also set to enter an arrangement with China’s Great Wall to build an electric version of its Mini.
Three, China has also decided to tighten emission rules, which mandate that a vehicle needs to travel 100 kilometres on 5 litres of fuel. To avoid non-compliance, Financial Times says, “carmakers are starting to change the composition of their Chinese fleet by bringing in electric vehicles”. Moving to hybrid vehicles is an option.
According to China’s Ministry of Industry and Information Technology, these measures will not only lead to improvement in fuel efficiency of traditional fuel vehicles, which will result in prevention of 114 million tonnes of CO2 emissions, but also create a market for nearly 5 million EVs by the year 2020.
China has unveiled a plan, part of its ‘Made in China 2025’ mission, under which it wants domestic carmakers to sell 3 million EVs a year, making up around 80 per cent of the country’s total domestic sales. Under the same plan, the top two EV makers in the country will also have to sell 10 per cent of their cars overseas.
Powering The Battery Supply Chain
Battery forms the most important part of an EV. The amount of energy that can be stored in the battery determines the range of an EV. Battery alone can form up to 40 per cent of the cost of an EV in many cases.
With state-led initiatives, China has managed to dominate the supply of this critical equipment and the elements required to make it — lithium and cobalt. These two elements, along with nickel and manganese, are indispensable in the production of EV batteries.
Most of the known deposits of the silvery-blue metal in the world, around 60 per cent, are in the Democratic Republic of Congo (DRC), an unstable country in central Africa. Given the Chinese Communist Party’s ability to strike deal with other dictatorial regimes, at least eight of the DRC’s 14 cobalt mines, accounting for half of the country’s cobalt supply, are owned by China.
This cobalt is shipped to China, where it is refined and used in batteries that power China’s EV revolution. Currently, Bloomberg says, China has 57 per cent of the production capacity of nickel-manganese-cobalt oxide batteries.
China also dominates the lithium supply chain. Most of the lithium comes from Chile, Argentina and Australia. Last year, Chinese company Tianqi spent over $4 billion to become the second-largest shareholder in a Chilean company. China’s Ganfeng Lithium has 50 per cent stake in a large Argentinian lithium project. Ganfeng also has a 50 per cent stake in a major Australian mine and a 9 per cent stake in Australia’s Pilbara Minerals, which controls the largest hard rock deposits of lithium. China has large lithium deposits of its own too, but does not produce much at home.
Today China produces at least two-thirds of the world’s lithium-ion batteries. Being in control of the raw material, it will dominate the battery market for the foreseeable future. The US, home to Tesla, produces just 5 per cent.
But Is Growth Sustainable Now That The Subsidies Are Going?
China has been steadily reducing the subsidies it offers on EVs, and plans to phase out the incentive completely by the end of 2020. However, the sale of EVs in the country has only grown year-on-year. Despite deeper than expected cuts in 2019, EV makers have managed to sell more cars in the first quarter of this year than in the same period last year. In the second quarter, Fitch Ratings says, it will continue to grow despite cuts.
According to Fitch, EV manufacturers will now subsidise the vehicles for the buyers and pass on some losses to the suppliers. EV makers will continue to “prioritise volumes and market share over profitability”, it says.
The implementation of China’s New Energy Vehicle Mandate Policy has left carmakers in China with no option other than investing in EV manufacturing. They will have to find customers for the EVs they build. The need to meet credit requirements under the policy, which will become more pronounced in the coming years, will push the manufacturers of EVs to keep the prices in control to make their vehicles affordable.
Of course, the naturally growing demand for the vehicles, and the nudge from the government, will also continue to help sale.
However, not all EV players will survive. Some 500 companies are registered to make EVs in China. Taking advantage of the subsidies offered by the government, many inefficient EV makers had cropped up in the Chinese market. Some have survived solely because of the subsidy offered by the government. With no subsidies, their survival is doubtful, and the industry may see consolidation.
The elimination of state subsidies has levelled the playing field for foreign players. As a result, China’s EV industry may get more foreign investment. The foreign players making convention fuel vehicles will need to invest in the EV industry to meet the credit requirement or will have to buy credits from others. Many foreign players have already formed joint ventures with Chinese EV makers.
Therefore, experts believe, the net effect of the withdrawal of the subsidies given by the Chinese government for a decade may be positive.