Beijing had made a big bet on electric vehicles (EV). But like so many other efforts of China’s centrally planned economy, things have not gone well. Intense price competition among China’s many EV producers as well as waning demand—both in China and abroad—have put manufacturers into financial trouble, with some reporting losses despite still considerable public support. Beijing has begun to step away from the effort, leaving local governments to pick up the subsidy slack. It is not a sustainable situation.
This now failing effort began more than five years ago. According to the MIT Technology Review, the raft of subsidies, tax breaks, procurement contracts, and other more oblique incentives to ramp up production and make China dominant has cost Beijing the equivalent of some $230 billion. The push eventually created a market for 13.1 million vehicles that accounted for 60% of EV ownership globally. Beijing also pushed for global sales of Chinese-made EVs. That effort made little headway in the United States even before Washington began to show increased levels of hostility toward China and Chinese products. The effort did, however, have considerable success in Europe.
Now global sales seem set to decline. Washington has imposed tariffs on a number of Chinese products, including EVs and their components as well as Chinese-made batteries and parts. Washington’s moves changed little, of course, since Chinese EV’s had made little-to-no headway in North America. But tariffs and general levels of hostility do make it clear to Chinese EV producers that they have no hope of eventually making gains in the United States. Further squelching hopes for Chinese EV sales in this country are the difficulties facing the EV efforts of domestic U.S. producers, except perhaps Tesla. Chinese sales would in other words have faced difficulties even if Washington was not hostile. Meanwhile, Europe, where Chinese EV sales had been strong, has begun to complain that China is dumping low-priced vehicles on European markets and in the process is stymying the development of independent European EV production. Accordingly, the EU is ready to place tariffs of up to 45 percent on imports of Chinese EVs, squelching any hopes that Chinese producers can look to robust European sales any time soon.
Beijing, already stuck with other planning errors that have created overcapacities in other areas of China’s economy, has backed away from the EV push. It has cut that support back nearly 66% from what it had offered the industry in 2018. Such an action would normally force a consolidation in the industry. Weaker, less efficient firms with poorer products would go out of business after a while, leaving others to find financial health at lower production levels. But that is not what is happening. Instead, local governments, many already in difficult financial straits, have spent to keep what are rapidly becoming zombi firms afloat.
Some regions–Shanghai, Shenzhen, and Changping stand out–have begun offering Chinese EV buyers rebates ranging from 1,000 to 10,000 yuan a vehicle. Some localities are trying to support EV producers more directly. They claim to be doing this in order to retain and expand the high-income workforces associated with EV production. Some of the local governments have little choice. In the salad days when Beijing was giving the industry a lot of support, these local authorities found ways to involve themselves in the effort through direct investments in EV producers or taking out loans and issuing bonds on behalf of these manufacturers. The City of Hefei, for instance, stands to lose its 5-billion-yuan investment in the EV division of NIO, Inc.
This situation is clearly untenable. These local governments already face financial difficulties. They can little afford to support unprofitable companies, especially since a global sales pickup is highly unlikely. Ultimately the consolidation will occur, private investors will face losses as will local governments, even as they also lose the high-income workforces they are striving to retain. China then will face another bump in the road to economic recovery.