How China beat everyone else to become the world leader in electric vehicles

Latest Updates: In the global pursuit of reducing carbon emissions, various nations, ranging from the United States to New Zealand, are implementing incentives to drive the sales of electric vehicles (EVs). China, having employed such strategies for years, has emerged as the largest EV market on the planet, showcasing remarkable success. Last year, EVs constituted an astonishing 25% of all passenger cars sold in China, surpassing the roughly one in seven ratio in the US and one in eight in Europe. Furthermore, this progress is accelerating at a rapid pace. HSBC anticipates that the electric vehicle penetration rate in the world's second-largest economy will reach a staggering 90% by 2030.

Taking into account plug-in hybrids as well, China's sales of eco-friendly vehicles reached an impressive 5.67 million in 2022, surpassing half of all global deliveries. According to BloombergNEF, the country is projected to contribute approximately 60% of the world's 14.1 million new passenger EV sales this year.

It's not just consumers who are driving the electric vehicle (EV) industry's growth; manufacturing is flourishing as well. According to recent analysis by HSBC analysts, Chinese brands account for roughly 50% of global EV sales.

The availability of adequate infrastructure plays a crucial role in facilitating EV adoption. China, boasting the largest charging network worldwide, installed a staggering 649,000 public chargers in 2022 alone, accounting for over 70% of global installations during that year.

Inspired by the remarkable progress achieved, EV manufacturers have flooded the Chinese market with new models, leading to a price war as companies vie for a competitive edge. Analysts predict that industry consolidation is on the horizon in China as companies seek to position themselves strategically amidst this intense competition.

Taking a closer look at China's comprehensive approach to promote the adoption of electric vehicles (EVs), we can identify both incentivizing measures ("carrots") and regulatory measures ("sticks") implemented by the government:

The Carrots

1. Consumer Subsidies: Over a decade-long program, EV buyers were reimbursed with substantial subsidies of up to 60,000 yuan ($8,375). Although national subsidies ended in 2022, local governments, such as Shanghai, continue to offer rebates of up to 10,000 yuan.

2. Tax Breaks: Since 2014, a 10% tax levy has been waived for clean-car purchases under 300,000 yuan, lasting until 2025. From 2026 to 2027, the tax break will be reduced to 5%. The total estimated value of this tax break by the end of 2027 is around 835 billion yuan. In contrast, the US passed the Inflation Reduction Act, which includes $270 billion in tax incentives for EV purchases and clean manufacturing, along with approximately $12 billion in loans for clean-energy projects.

3. Manufacturer Subsidies: Direct government support has aided EV manufacturers in establishing their operations. This assistance led to the emergence of numerous companies, with over 500 EV brands saturating the market in 2019. However, this effort also nurtured success stories like BYD Co., which has become the top-selling brand in China, ending Volkswagen AG's longstanding dominance.

4. Infrastructure: Extensive, government-subsidized charging stations have been widely deployed, reducing costs for EV drivers and alleviating range anxiety. Charging standards are standardized through agreements with manufacturers, ensuring uniformity of plugs. As of May, China possessed 6.36 million EV chargers, surpassing any other country globally. A significant portion of these chargers is connected to the state grid, with private companies like Wanbang New Energy Investment Group Co. and TGood New Energy Co. also contributing.

The Sticks

1. Gas Hurdles: The appeal of purchasing and owning gasoline-powered cars is diminishing. To combat congestion, cities have implemented measures such as lottery systems for new license plates in Beijing and auction systems in Shanghai. The average price for license plates at Shanghai auctions was 92,780 yuan during the first five months of the previous year. In contrast, EV drivers can easily obtain green license plates, showcasing their environmentally friendly status, which are becoming increasingly prevalent on city streets.

2. Production Penalties: China introduced a dual-credit system for the auto industry in 2017, which rewards manufacturers with points for producing clean cars while imposing penalties for those with high fuel consumption. Cars from manufacturers with negative scores may be removed from the market. To avoid penalties, companies can purchase credits from rivals with positive scores, such as Tesla Inc. or BYD. This can be a costly endeavor, as exemplified by state-owned Chongqing Changan Automobile Co., which incurred a loss of 4,000 yuan in profit for each car sold in 2020 while purchasing credits to evade penalties.

The Sales

Government Purchases: Several local governments took the initiative to transition their public transport and taxi fleets to 100% electric vehicles (EVs), while also urging local agencies to prioritize the procurement of electric or plug-in hybrid vehicles. This approach ensured a consistent stream of business for EV manufacturers like BYD, which is renowned for producing not only electric cars but also buses, and Guangzhou Automobile Group Co.