China’s success in vehicle electrification has been highly attributable to conducive government policies both at the central and regional level that subsidized electric vehicle (EV) manufacturing and sales. It was due to the government’s support that EV costs were brought on a par with ICE vehicles that has put China on the path to the mass adoption of the technology.

However, with the local EV market getting more established by the day, the government has been phasing out subsidies on the new energy vehicles. The latest developments suggest that the government could completely stop EV subsidies by the end of 2022.

As per the announcement made by the country’s Finance Ministry, China will cut subsidies on EVs by 30% this year and will eliminate all subsidies by the end of the year. In 2020, the government announced it would cut subsidies for private NEVs by 10% in 2020, 20% in 2021 and 30% in 2022. For public transport, the plan was to cut by 10% in 2021 and 20% in 2022.

However, nothing went to plan with the advent of the COVID-19 virus in the country. Now, in a similar move, the government recently announced the replacement of its green car credit system with a new carbon emission trading scheme (ETS) that has a larger vision of carbon neutrality than just individually boosting EV production/sales.

The news comes as a blow to the China EV industry as subsidies have remained a major catalyst for the EV market’s growth in over the past five years. Before the introduction of EV subsidies in 2009, the BEV sales volumes were limited to a few hundred units.

For 2021, the BEV market is forecast to finish at 2.58m.

The conducive environment and availability of key raw materials has helped China to be the top EV market globally both in terms of production and sales. But on the flip side, it impacted the market with a high level of fragmentation and overcapacity. It is estimated that China has over 500 EV manufacturers registered in the country – the highest in the world. The subsidies have also been a big burden on the government’s treasury, which would have always resulted in a review of the subsidy program. As per media reports, since NEV subsidies were introduced in 2009, it is estimated that they cost the Chinese central government more than CNY200 billion, with local governments spending an estimated additional CNY100 billion adding up to $47 billion in total.

As well as undoubtedly dampening EV demand the end of subsidies could also create trouble for the small and new EV startups emerging in China impacting both their investments and funding. This may be also seen as an opportunity that will bring down fragmentation, overcapacity and low-quality product issues in China. Further, things may be relatively easier for the leading brands. However, with fierce competition in the market, they will need to justify the increase in the cost of EVs with better quality, performance, safety and new features. As we have seen in the ICE market, cost benefits due to subsidies will be of diminishing value.

With large investments being already made in EVs, batteries and related technologies, it seems like the Chinese EV market will enter an era of autonomy with a better product and marketing mix.

A 360-degree view is that the end of subsidies is no threat to the EV future in China; it just impacts the next few years via the possibility of a relative slowdown in EV growth. To date, the Chinese government stands firm on its target 20% share of NEVs in total sales by 2025. As with much of the electric vehicle market, China is the dominant force in global lithium-ion battery production. While most of the world’s lithium supplies rest in other countries, China has already secured the rights to the majority of it for future production. This clearly means that the future in China has to be electric.

GlobalData forecasts Chinese production of electric vehicles to reach an annualised 20.5 million units by 2036.

This article first appeared in GlobalData’s Automotive Intelligence Center