Slowdown in China EV sales expected as subsidies end

A notable impact to global electric vehicle (EV) sales in 2023, and EV battery demand as a result, will be the alteration of China’s EV subsidies this year

The change to subsidies forecast to have the greatest impact on EV sales is the subsidy provided to automakers (OEMs). As of January 1, 2023, OEMs in China are no longer offered financial subsidies for EV production. While Beijing began reducing subsidies from 2018 and was only available to cars costing less than 300,000 RMB (USD 43,700), it is predicted that the total elimination of support this year will slow EV sales growth rates in the first half of the year.

Subsidy removal will result in increased EV prices

It is thought that the removal of this subsidy will cause a slowdown for three key reasons. The first is an increase in EV prices. A breadth of automakers in China, including BYD, GAC and Dongfeng, all announced price increases in November 2022 in advance of the end of subsidies. The OEMs have explained the increases as a necessity on the basis that the phaseout of subsidies will squeeze their tight profit margins, which are already being squeezed by rising costs of battery materials, supply chain disruptions and Covid-19 lockdowns.

BYD, the most popular EV manufacturer in China in 2022, has stated that it will be raising prices between 2,000 yuan (USD 290) and 6,000 yuan (USD 872) in 2023 across all models. The automaker’s decision to increase costs can be explained by the graph below, which illustrates the cost pressures that the OEM has been facing since 2020, with gross profit margin’s falling from 25.2% in 2020 to 16.3% in the first half of 2022 due to rising material costs. With the additional removal of the OEM subsidy in 2023, BYD, along with other automakers, has been forced to pass on some of these costs to consumers by increasing EV prices.

Given that BYD made up six of the top ten EV models in China in the January to November 2022 period (with the Song Plus model in first place), Fastmarkets believes that a price increase will impact a breadth of EV consumers in the market by making it less attractive to purchase an EV. As a result, we expect to see slower EV sales growth rates in the first half of this year.

Drop in EV sales expected as vehicle prices rise

It is also believed that the end of the OEM subsidy will dampen EV sales in the first half of 2023 because historically, a decline in subsidies in China has been followed by a decline in sales. This is best observed if we look back to the 2017-2019 period of passenger EV (PEV) sales (chart below). The labels highlight two previous reductions in the OEM subsidy by the government. One in May 2018, where the subsidy was cut for vehicles with a range lower than 140km, and another in June 2019, where subsidies were cut by 45-60% for vehicles with ranges lower than 250km. Following these cuts, we can see a drop in PEV sales, before sales readjust and return to upward growth again around 2-4 months later. This showcases a correlation between subsidy cuts and EV sales in the market, leading us to expect that this trend will play out in 2023 when the OEM subsidy ends.

That said, we should note that previously, OEM subsidies were higher and applied to a broader number of vehicles, meaning that the subsidy’s net contribution to EV prices was larger. For example, using Table 1, we can see that OEM subsidies in 2018 were provided to vehicles in five different vehicle ranges. However, in 2022, only two of those range categories qualified. We can also see that the size of the subsidy has been reduced over time, notably by 10%, 20% and 30% from 2020 to 2022. This has meant that the subsidy contributed to ~10% of the EV price in 2022, compared with ~35% in 2017.

Consequently, while we expect that the removal of the subsidy in 2023 will dampen EV sales, in line with historical trends, its removal will not have as severe an impact as in previous years when the subsidy made up a greater percentage of the EV price.

China EV sales growth on a downward trajectory

It’s also important to highlight that EV sales growth rates have already been on a downward trend since the end of 2021, with sales slowing in November 2022 due to the macroeconomic downturn and rising Covid-19 cases. Indeed, data from China’s Association of Automobile Manufacturers (CAAM) (highlighted in the chart below) shows that PHEV and BEV sales growth rates had noticeably slowed year-on-year. Indeed, PHEV sales in November 2022 did not reach a three-digit growth rate for the first time since April 2021, while BEV sales attained their lowest growth rate (67.4% year on year) since June 2020.

As a result of these three factors, Fastmarkets forecasts that there will be 8.7m passenger electric vehicles sold in China in 2023, representing growth of 43.8% year on year, a notable slowdown from 2022 where estimated growth was 72.2% year on year.

That said, despite the predicted slowdown in sales in the first half of 2023, it is predicted that EV sales will remain positive in the market throughout the remainder of the year. Many automakers have decided not to raise EV prices and to instead absorb the added costs created by the ending of the OEM subsidy.

This decision is thought to be due to an ongoing EV price war in China, instigated by Tesla in October 2022 when the automaker cut prices to its Models 3 and Y due to slowing EV demand. Tesla then went on to cut prices for a second time on January 6, 2023, resulting in a total reduction of Tesla’s vehicle prices by 13-24% (according to prices on Tesla China’s website) over the past three months, putting pressure on other automakers in China to follow suit. With manufacturers including SAIC, Nio, XPeng and Li Auto choosing to maintain their prices and absorb costs, there will continue to be a breadth of affordably priced EVs available in the market, limiting the downside risk presented by the end of the OEM subsidy.

Tax policies will support and strengthen EV sales

It is also expected that changes to the government’s vehicle tax policies for EVs and internal combustion engine (ICE) vehicles in 2023 will support EV sales this year. First, we note the decision made by the government in August 2022 to extend the EV tax incentive, allowing EVs to be exempt from the 5% vehicle purchase tax. As this is a continuation of an existing policy, it’s thought that this incentive will not have a noticeable impact on sales. However, the extension will give EV sales an edge over ICE sales due to the re-introduction of the 10% purchase tax for ICE vehicles in 2023. The tax was halved between June to December 2022 in order to stimulate the domestic auto industry, but will return to 10% in January 2023. We expect that the increase will further consolidate consumer interest in EVs by making it less attractive to purchase an ICE in 2023.

Fastmarkets also remains broadly positive on the EV market in 2023 due to the ever-growing EV penetration rates. Data from 2022 showcases that EV sales made up 25% of total vehicle sales in the January-November 2022 period, highlighting that EVs are firmly in the ‘mass adoption’ stage. This is also showcased by the growth of the commercial electric vehicle (CEV) segment, which grew 85% year on year in the January-November 2022 period, with light electric trucks, electric buses and trucks becoming increasingly popular for fleet operators with short-haul networks. Moreover, EV penetration rates in the CEV segment are expected to expand in 2023 as new electric van, pickup and truck models with longer ranges are added to OEM lineups, which is expected to attract a greater breadth of customers.

The road ahead for EVs

The EV revolution will take shape globally – there is simply too much critical need driving it forward. But battery makers and automakers will need to navigate the complexity and volatility of both supply and price across the battery materials market, making access to price, news, forecasts, and analytics vital to compete and win in the EV revolution.

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