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March 27, 2019

China cuts EV subsidies by more than expected

China is cutting subsidies on electric vehicles to encourage local manufacturers to rely on innovation rather than government assistance as the industry matures and costs fall, a media report said.

By Olly Wehring

China is cutting subsidies on electric vehicles to encourage local manufacturers to rely on innovation rather than government assistance as the industry matures and costs fall, a media report said.

According to Bloomberg, the cuts were deeper than expected and shares of the country's top EV makers slid.

The report, citing a Chinese ministry of finance statement, said the subsidy for pure battery electric cars with driving ranges of 400km (250 miles) and above would be cut by half to CNY25,000 (US$3,700) per vehicle from CNY50,000 yuan. To qualify for any subsidy, electric cars need to have a range of at least 250km compared with 150 kilometers previously.

Bloomberg noted the government had warned of its plans to scale back subsidies and phase them out completely after 2020, though it hadn't given details. While financial support for purchases had fueled the rapid growth of China's electric car industry, there were concerns automakers had become overly reliant on them at the expense of developing new technologies and better vehicles.

"While the incumbent OEMs will see some earnings damage, we consider NIO the most vulnerable of all," Bernstein analyst Robin Zhu wrote in a report Bloomberg cited.

"Despite struggling for demand, the company recently indicated it won't reduce prices to offset lower EV subsidies. Today's subsidy cuts mean NIO's cars just got meaningfully more expensive for consumers."

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The finance ministry also urged local governments in China to remove subsidies on purchases of electric vehicles, including buses and trucks, after a three-month grace period starting 26 March.

When combining the halving of subsidies for EVs with at least 400km of range with the complete removal of direct incentives from local governments, the total reduction is 67%, a more drastic cut than the 40% or 50% the market was expecting, Jefferies analyst Patrick Yuan told Bloomberg.

The report said subsidies had been key to making plug-in hybrids and EVs  more affordable to Chinese buyers and helping the country pass the US as the world's biggest market for such vehicles in 2015.

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