When will China decide to subsidize electric vehicles?

Without government subsidies, hybrid and electric vehicles are a hard sell for the average American consumer. Not surprisingly, this would also appear to be the case in China. Toyota has so far managed to sell only a few hundred Priuses per year in China. Perhaps this is due to its tariff-laden sticker price, the equivalent of about US$41,000.

Given the uncertainty of future demand for these vehicles in China, it is not surprising that few foreign manufacturers are willing to import these vehicles or their parts (which are still subject to WTO-allowed import tariffs) for sale in China.

China’s “New Energy” Vehicle Manufacturers

China also has a few home-grown manufacturers of “new energy” vehicles, a category that encompasses hybrids, plug-in hybrids, pure electric vehicles and fuel cell vehicles. The most well-known outside of China is BYD, a Shenzhen automaker with roots in the manufacture of batteries and mobile phone handsets.

BYD captured attention over a year ago when Warren Buffet’s Mid-American Energy, a Berkshire Hathaway subsidiary, invested over $200 million for about ten percent of the Hong Kong listed company. BYD has a couple of “new energy” offerings.

The F3DM, a plug-in hybrid, though announced to the public in December of 2008 was just last month finally made available for consumers to buy.

BYD’s E6, a pure electric vehicle will reportedly be tested as part of Shenzhen’s taxi fleet this year, and the company has also announced that the E6 will be its first entry into the US market, possibly as early as the end of 2010.

Zotye, a small Zhejiang province-based automaker also reportedly has an electric vehicle ready for sale, as do Chery of Anhui Province and Lifan of Chongqing. So far though, none of these has sold a single new energy vehicle to a Chinese consumer.

Vague Announcements on Subsidies

In March of 2009, China’s National Development and Reform Commission (NDRC) released its “Automotive Industry Adjustment and Revitalization Policy” which both encouraged the development of new energy vehicles and recognized the need for consumer subsidies to support their sales in China.

And in March of 2010, Miao Wei, China’s Vice Minister of Industry and Information Technology announced that the government is considering subsidies of between 50,000 and 60,000 yuan (approx. US$7,400 to $8,800) per vehicle. However, he was not specific about when the subsidy would be implemented.

Automakers’ Complaints

In the fall of 2009, BYD Chairman Wang Chuanfu, speaking at a conference, was vocal about his disappointment that the Central Government had still not announced subsidies for new energy vehicles. He said that BYD’s inability thus far to make these cars available to consumers was due to the lack of subsidies.

So while BYD was leading the way among Chinese automakers in fulfilling government policy by developing these vehicles, the government, according to Wang, was not yet upholding its end of the bargain by implementing subsidies.

Wang Chuanfu would not be the only leader of an automaker to prod China’s government toward a decision on new energy vehicle subsidies. Carlos Ghosn, head of Renault/Nissan, also announced just a few days ago at the Beijing Auto Show that Nissan’s new Leaf electric vehicle would probably not be sold in China until a subsidy is announced.

It’s all about who benefits

So if China’s government wants new energy vehicles to be developed and sold in China, why has it taken so long to announce a consumer subsidy? I asked the same question of a Chinese auto executive (who shall remain anonymous) about a year ago.

He responded. “Who is selling these vehicles in China right now? Toyota? Why would the government want to subsidize the purchase of foreign brands? You will not see an announcement on subsidies until the government can be sure most of the money will support domestic brands.”

Indeed, we should not be surprised that China’s government wants to support domestic brands. This was also the case with China’s tax breaks on small cars with engines of 1.6 liters or less beginning in early 2009. Another auto executive in China shared with me statistics demonstrating why the tax breaks went to cars with engines of 1.6 liters or less.

Though traditional categorization of engine sizes for statistical purposes are cut off at the zeros and fives (e.g. 1.0-1.5 liters, 1.5-2.0 liters, 2.0-2.5 liters, etc.) 1.6 liters was exactly the cutoff point at which domestic Chinese manufacturers would most benefit from the tax break. (Of course, this may no longer be the case as foreign manufacturers rushed to increase production of small cars in response to the tax break. The tax break was also scaled back earlier this year.)

The point here is that China’s government is very much involved in guiding the development of its automotive industry, but the focus, far from being on giving consumers the best options, is on giving its domestic manufacturers – whether state-owned or private – a leg up against foreign competition.

Whether China’s auto manufacturers ever become competitive outside of China (and I am betting they will), we can be certain that the government will ensure that ultimately, the China market belongs to the domestic manufacturers.