In Depth: Amid China’s EV Boom, Conventional Carmakers Cry Foul

The rapid growth of new-energy vehicles (NEVs) in China has largely been driven by government support, causing discontent among traditional automakers who feel they face an uneven playing field compared to their NEV counterparts. In July, for the first time, NEVs, accounting for over 51% of car sales, outsold traditional vehicles in China's passenger car market, a trend that continued through August, September, and October with NEVs making up 54%, 53%, and 53% of sales, respectively [para. 1][para. 2][para. 3]. This significant growth in NEV sales is primarily attributed to policies implemented since 2009, which include state subsidies and tax incentives aimed at reducing fossil fuel reliance and carbon emissions. Consequently, NEVs constituted 35.7% of car sales in 2023, up from 6% in 2020, and are projected to reach 80% by 2030, according to JP Morgan Securities [para. 4][para. 5].

Concerns have been raised by traditional automakers and stakeholders about how the government's preference for NEVs might be squeezing profits and sales of conventional cars, potentially affecting economic development and employment in regions dominated by the conventional car industry [para. 6]. During China's top legislative session, a proposal to promote hybrid EVs (HEVs), put forth by Feng Xingya of Guangzhou Automobile Group Co. Ltd., highlighted HEVs as an "upgraded version" of traditional vehicles and another direction for green car technology development. Feng argued that the surge in NEV popularity is shrinking market opportunities for conventional vehicles, forcing automakers to reduce prices and subsequently profit margins, which hampers investments in electric technologies [para. 7][para. 8][para. 9]. At a June industry event, GAC's Chairman Zeng Qinghong advocated for equal treatment of traditional vehicles and NEVs, cautioning against a blanket approach to the auto industry due to the carbon emissions from coal-powered electricity generation used by NEVs. However, research indicates that NEVs generally produce fewer emissions than fossil fuel vehicles even with current power generation methods [para. 10][para. 11][para. 12].

Fang Haifeng, at a recent industry forum, recommended re-evaluating policies driving NEV growth due to emerging risks such as reduced automaker profits and job displacement. The rapid shift to electrification has left some traditional supply chains unable to transition effectively, resulting in mismatches in industry talent and employment [para. 13][para. 14][para. 15].

China's policy of exempting NEVs from various taxes, while discontinuing purchase subsidies in 2023 after sales targets were met, raises concerns of unfairness. NEVs are exempt from vehicle purchase taxes, annual vehicle taxes, and fuel taxes that fund road maintenance, provoking questions regarding their contribution to tax revenues [para. 16][para. 17]. By 2025, NEV-related exemptions might result in a 10% decline in vehicle purchase tax revenue compared to 2022 if untouched [para. 18].

With NEV tax breaks extended through 2027, the potential cancellation of these incentives poses challenges. Previous reductions in subsidies led to a drop in NEV sales, causing some automakers to exit the NEV market. Industry opinion is divided on the impact of removing tax breaks; some believe it could spur innovation among remaining NEV companies [para. 20][para. 22]. A McKinsey survey suggests that embracing smart driving systems and digital cockpits might help NEVs endure the elimination of tax benefits [para. 23].