New energy vehicles (NEVs), which will substitute conventional vehicles, are expected to be increasingly popular in China, but the government’s existing goal to increase the market share of NEVs to 20% by 2025, from 1.8% in 2016, will not be easily achievable according to Fitch Ratings. This is because government subsidies for NEVs are due to end after 2020 and bottlenecks in battery technology and charging infrastructure are likely to constrain widespread adoption of NEVs in the private sector.
Mr. Xin Guobin, the Vice Minister of Industry and Information Technology, said at a recent forum that the Chinese regulators have started to study a timetable to end production and sales of conventional internal-combustion-engine (ICE) vehicles. Fitch views this as the Chinese government’s response to the ambitious timetables set by other countries.
In 2016, the Netherlands and Germany announced plans to ban sales of ICEs by 2025 and 2030, respectively. In mid-2017, India announced it would electrify all the vehicles for sale by 2030, and France and the UK set their deadlines at 2040.
“These timetables have been set to urge global automakers to accelerate development of electric vehicles (EV); but we believe the deadlines are likely to be extended because EV penetration in most of these markets is low.”
Sales of NEVs in China have been strong since 2014 and have made China the largest EV market in the world. Sales have been driven by supportive government policies, including generous subsidies, exemption of NEVs from licence-plate restrictions in large cities, and wide public-sector deployment.
However, growth may slow once government subsidies phase out by end-2020, which will reduce the economic attractiveness of NEVs relative to ICEs. In addition, given the sheer size and geographical variation of the Chinese automobile market, automakers are unlikely to be able to completely electrify all vehicles while meeting the diverse needs of Chinese consumers in the foreseeable future. China’s NEV market is currently geographically imbalanced, with the majority of sales concentrated in top-tier cities, and dominated by low-end models.
“China’s timetable will remain challenging, but we believe the Chinese NEV market is set to grow in the next decade as automakers have strong incentives to increase their NEV offerings in China under tighter fuel-economy regulations and the NEV credit scheme likely to come into effect in 2018-2019.”