How the Virus Can Stall China’s Electric Vehicle Plan

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1. Where do things stand?

Just 1.5% of the 260 million automobiles in use in China at the end of last year were EVs. But President Xi Jinping’s government considers them crucial to the country’s industrial future. The head of a government advisory panel said in September that authorities want new-energy vehicles to account for 15% to 25% of new car sales in 2025 (from 5% in 2019), and at least half by 2035. Chinese companies including BYD Co., backed by Warren Buffett, dominate the market, and foreign automakers have ambitious plans. Volkswagen, General Motors and Daimler are among the global heavyweights beefing up their EV strategies. This year’s new models include GM’s Menlo, its first electric Chevrolet in China, and Daimler’s Beijing-made Mercedes EQC. Tesla Inc. in January began deliveries from a new factory in Shanghai, its first outside the U.S.; CEO Elon Musk forecast it could eventually produce 1 million cars a year. VW is rolling out a test fleet of its premium electric SUV model, the Audi e-trons, in the eastern city of Hefei.

2. What’s the impact from Covid-19?

Once China’s government imposed lockdowns, buyers stayed home and demand disappeared. Passenger electric vehicle sales fell 58% in the first quarter compared with a year earlier, steeper than the 45% decline in the overall passenger car market, according to BloombergNEF. Despite big jumps later in the year, by September, EV sales were still down 27% from last year’s levels. China’s new-energy vehicle market is set to show a decline of about 14% for the full year, according to BNEF data, after a flat year in 2019. The China Association of Automobile Manufacturers forecast a 9% drop to 1.1 million units this year, in what it says would be the second straight annual decline.

3. Is the coronavirus the only problem?

Unfortunately not. Even before the pandemic the Chinese auto market was in trouble. Car sales fell in 2018, the first decline in more than two decades, and dropped again last year as the U.S.-China trade war, a credit squeeze and other factors hit the economy. Demand for EVs fell sharply after the government cut back on subsidies in mid-2019. China’s biggest automaker, SAIC Motor Corp., suffered a 29% drop in earnings last year — before the pandemic. BYD reported a 42% earnings decrease.

4. So is it a bump in the road or more serious?

Hard to say. Anecdotal evidence from the city of Wuhan, ground zero of Covid-19 in China, suggested auto dealers were benefiting from pent-up demand once the lockdown lifted. The overall recovery had gathered pace by mid-year and car sales rebounded. Still, researchers including S&P Global Ratings say they may not reach 2019 volume levels again until 2022. The economy is going to continue to struggle as the pandemic hits many of China’s trading partners. Growth may fall to just 1.4% this year, down from 6.1% in 2019, according to Bloomberg Intelligence.

5. What’s the government doing?

It will keep domestic EVs exempt from a 10% sales tax, and it agreed to prolong subsidies for EV purchases (which were supposed to end in 2019) for two more years, aiming to stabilize market expectations and boost sales. Regulators also delayed the nationwide roll-out of stricter emission rules (already in effect in some areas) to allow carmakers and dealers to continue to sell older models in their inventories. But while some countries in Europe, for example, plan to ban the sale of gas-powered cars starting in 2035 or sooner, China has no such deadline. The head of the advisory panel, Wang Binggang, said conditions aren’t yet suitable to set a target date.

Investors were showing an increased interest in EV companies: Tesla and NIO Inc. shares have surged this year, and Chinese contenders Li Auto Inc. and XPeng Inc. had successful stock-market debuts. But the many private-sector startups are vulnerable to a shakeout, and steep drops in share prices in September had some investors questioning the prospects of smaller Chinese contenders. There are also foreign companies giving up on segments of the market: Renault SA in mid-April said it had agreed to transfer its 50% stake in a local venture to partner Dongfeng Motor Corp., but the French automaker will still try to sell EVs in China through another partnership.

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