In the context of China's new energy vehicle (NEV) industry, government subsidies have played a crucial role in driving innovation and growth. However, as subsidy standards gradually decline, the financial pressure on automotive companies is increasing significantly. Even industry leaders like BYD, which has long dominated the domestic NEV market, are now facing challenges.
The recent reduction in subsidies has had a noticeable impact on sales performance. In January 2023, the sales volume of new energy passenger vehicles dropped sharply to 540,000 units, representing a year-on-year decrease of 61%. This trend was also reflected in BYD’s monthly sales, which fell to just 605 units during that period. While the implementation of updated subsidy policies helped boost sales in subsequent months, the overall growth rate has slowed down, especially when compared to previous years.
Since 2014, annual sales of NEVs in China have more than doubled. However, from 2016 onward, the growth rate began to decline. Last year, the total sales reached 507,000 units, with a year-on-year increase of 53%. In the first half of this year, sales hit 195,000 units, showing a 14.4% increase—still far below the earlier growth momentum. Additionally, the market share of NEVs in the broader automotive sector has declined slightly, from 1.8% last year to 1.5% this year.
Making profits in the electric vehicle (EV) sector is no easy task. Traditional automakers such as Toyota, Volkswagen, and General Motors have been successful in traditional markets, but many struggle to turn a profit in the EV space. This has led to hesitation among international automakers in entering the Chinese EV market. Even Tesla, despite its global success, has yet to achieve consistent profitability in the region.
Joint venture brands that have introduced plug-in hybrid models have reported increasing losses due to high production costs and low demand. In contrast, independent Chinese brands have gained ground in the NEV sector, largely thanks to supportive policies and subsidies. In the first half of this year, the top ten NEV sellers in China were all independent brands, with BYD continuing to lead in sales.
BYD has maintained its position as the world’s top NEV seller for two consecutive years, from 2015 to 2016. Although the company does not separately disclose the profitability of its NEV division, it is widely believed that BYD benefits significantly from government subsidies. Analysts have noted that the gross profit margin for BYD’s NEVs has consistently remained above 20%, with operating costs at 12%–15% and net profit margins around 5%–10%.
From 2015 to 2016, as NEV sales surged, BYD’s net profit attributable to shareholders of listed companies increased dramatically. The net profit rose to 2.82 billion yuan in 2015 and 5.05 billion yuan in 2016, with growth rates of 551.3% and 78.9%, respectively.
Experts in the NEV field, such as Qiu Junjun, have pointed out that while companies like BAIC and Chery have achieved certain levels of scale and profitability, the recent sharp drop in subsidies has created operational challenges. This has forced many manufacturers to adjust their strategies and pricing models to remain competitive.
This year, the new subsidy policy for passenger cars reduced the standard by 20% compared to 2016, while some models saw a 40% cut. Fast-charging pure electric buses faced a 60% reduction. Additionally, the way subsidies are allocated has changed—from an initial allocation to a year-end settlement. Vehicles purchased by non-private users must now accumulate over 30,000 kilometers to qualify for state subsidies. Local governments are also limited to providing no more than 50% of the central government’s subsidy, which used to be matched on a 1:1 basis.
As a result, BYD’s sales and net profit for NEVs in the first half of the year both declined. Its net profit attributable to shareholders of listed companies dropped to 1.72 billion yuan, a year-on-year decrease of 23.8%.
According to insiders, the national subsidy for plug-in hybrid vehicles has been reduced from 24,000 yuan to 12,000 yuan. Many local governments are not offering the full 12,000 yuan, so BYD has chosen to absorb the cost to maintain competitive pricing for consumers.
It is also reported that some NEV manufacturers have passed the burden of subsidy cuts onto battery suppliers. Unlike other carmakers, BYD has a self-sufficient battery supply chain, allowing it to internalize the impact of subsidy reductions.
In summary, while government support has been vital to the growth of China’s NEV industry, the ongoing reduction in subsidies is creating significant pressure on automakers. Companies like BYD are adapting by adjusting pricing, managing costs, and leveraging their own supply chains to stay competitive in a rapidly evolving market.
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