The EU has announced an investigation into whether or not Chinese manufacturers of electric vehicles are receiving unfair subsidies, as the number of such vehicles being exported to Europe has skyrocketed in recent months.
Like previous investigations into products like paper, steel, solar panels, and electric bicycles, this one could result in levies on vehicles sent to Europe from China by manufacturers like BYD, Nio, XPeng, or even Tesla's gigafactory in Shanghai, the United States.
However, it is unclear how or to what extent China subsidizes its electric vehicle industry.
Local, provincial, and national levels of government all contribute in some way to subsidizing and supporting various industries in China.
Even a partial accounting reveals the benefits can be substantial, from preferential treatment like cheap land or capital to regulations that outright ban foreign competitors, making it all but impossible to gain a clear sense of how much is being paid.
1. Tax reductions
Tax benefits for purchasing an electric vehicle are one of the largest quantifiable financial aids available. Almost all electric vehicles sold in China do not incur a vehicle purchase tax, lowering their out-of-pocket costs for buyers and increasing overall demand and revenue for automakers.
AlixPartners, a consulting firm, estimates that between 2016 and 2022, the Chinese government would have spent around $57 billion encouraging the purchase of electric vehicles. That doesn't even include incentives from provincial and local governments, and it's almost five times what the US government spent during the same period.
Beijing initially reduced taxes on EVs in 2009, and starting in 2014, EV purchases have been excluded from Beijing's car purchase tax.
As a means of bolstering the industry and the sluggish economy, it just extended the exemption until 2027, when it had originally planned to reinstate the levy at year's end. According to BloombergNEF, China may waive an additional $97 billion in taxes between 2019 and 2027, on top of the $30 billion already granted between 2009 and 2022.
According to Joanna Chen, a senior analyst at Bloomberg Intelligence, the majority of EV manufacturers qualify as high-tech businesses and, as a result, pay a 15% corporate income tax rate rather than the typical 25%. She also mentioned that the value-added tax of 13% does not apply to exported automobiles.
2. Production subsidies
Subsidies are distributed to automakers by the Ministry of Industry and Information Technology for each electric vehicle that is manufactured.
Bloomberg's estimates, based on MIIT's most recent subsidy evaluation, put the total amount spent subsidizing the development of around 3.76 million new-energy vehicles at over $5.4 billion. About 31 billion yuan of that was paid out to 49 qualifying automakers in the previous calendar year, with BYD receiving the most money and Tesla coming in second.
While sales of gasoline-powered vehicles have declined, sales of electric vehicles have increased thanks to government subsidies.
Until Tesla's facility opened in Shanghai in 2019, the company was unable to take use of the incentives because they are only available for electric cars and plug-in hybrids produced in China using Chinese batteries.
It's not dissimilar to the Inflation Reduction Act, which Vice President Joe Biden of the United States proposes to implement in order to subsidize consumer spending.
3. Cheap land, loans and grants
Governments at all levels in China attempted to stimulate their economies by providing entrepreneurs with cheap loans, land, and incentives as the EV industry took off.
In 2020, the city of Hefei and associated funds paid 7 billion yuan for a 24 percent share in Nio, while in 2021, the city of Hangzhou and associated funds contributed 3 billion yuan in Zhejiang LeapMotor Technologies Ltd during its pre-IPO investment round.
To accommodate the roughly 20 million new-energy vehicles expected to be on Chinese roads by the end of 2025, Beijing has also pledged to subsidize the installation of public chargers around the country.
According to the most recent accounting, the Ministry of Finance has shelled out about 20 billion yuan to subsidize charging infrastructure and spread awareness of electric vehicles.
A similar approach was used in the United States in July, when Congress allocated $7.5 billion to finance charging stations for electric vehicles. Charging stations have also received funding from the DOT.
4. Aid for New Product Development
Special grants for essential innovations and the development of new-energy vehicles and core components are examples of the kind of R&D subsidies that typically come from provincial or local governments.
They receive funding for the creation of new models, as well as tax breaks and equipment rebates.
For instance, in January, the provincial government of Hunan, where BYD operates a factory and many of its suppliers are located, announced that it would subsidize the creation of a new passenger vehicle model by 5 million yuan and the creation of a new type of new-energy vehicle model by 1.5 million yuan.
Car manufacturers who invest a total of 200 million yuan in an R&D center in the province will be eligible for a maximum subsidy of 50 million yuan from the province.
5. Buy in bulk
Government procurement has also helped China's EV industry, with towns across the country purchasing electric bus and car fleets made in China, thereby providing a reliable revenue stream for Chinese producers.
Centre for Strategic and International Studies report on Chinese government subsidies found that "demand for EVs in public or state-controlled fleets, including SOEs, grew significantly" in 2017.
The article claims that BYD, a company that makes both electric cars and buses and which counts Warren Buffett's Berkshire Hathaway as an early supporter, benefited greatly from these measures.
To support too many enterprises, many of which will never become successful, means that much of the subsidy money invested in China may have been squandered in the end.
According to AlixPartners managing director Stephen Dyer, "currently, the vast majority of the over 167 China brands selling EVs do not have enough volume to achieve profitability," and about 20-30 are expected to be financially viable long term.
"Only two of the five Chinese EV manufacturers that are publicly traded are profitable at the present time."
The larger automakers who are already exporting have a better chance of surviving, and subsidies are just one of the reasons they have become so powerful and can produce cars in a wide price range.
These businesses, aided by the government, have developed cutting-edge methods for manufacturing batteries, computer programs, and automobiles, making them formidable international competitors.
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