EV sales start to recover from virus hit

After taking a significant hit following the nationwide Covid-19 lockdown, electric vehicle (EV) sales in the world’s biggest market are finally showing signs of recovery.

In February, according to figures from the China Passenger Car Association (CPCA), new energy vehicle (NEV) sales plunged 77% year-on-year to a mere 11,000 vehicles—the lowest since January 2017, when Beijing began phasing out subsidies on electric vehicle purchases.

China’s biggest automakers have been the hardest hit by the virus. In March, the country’s NEV giants—BYD, BAIC, and Geely—saw their deliveries plummet by two-thirds year-on-year. This marked three consecutive months of decline, in which the automakers saw their deliveries fall by more than half.

Covid-19 had effectively crippled China’s mobility industry. In February, as lockdowns to contain the disease spread across China, the need for transportation services disappeared. Taxi and ride-hailing services—usually cash cows for China’s biggest OEMs—came to a standstill due to weak demand and poor revenue, the CPCA wrote in a March report (in Chinese).

BYD, BJEV, and Geely are the largest players in China’s business EV market. Not only do they supply EVs for mobility services in their home cities, but their vehicles are also deployed in countless cities nationwide as local governments electrify their taxi fleets.

Last year, BAIC reportedly received orders for more than 80,000 EVs from various ride-hailing services, while Geely inked a deal with Chengdu to replace the city’s fleet of 10,000 gas-powered taxis with EVs by the end of 2020. But the economic pressures faced by ride-hailing operators during the outbreak resulted in a “significant number” of new car orders being canceled, said Cui Dongshu, secretary-general of CPCA, on April 9. As infection rates climbed, electrification of these fleets became a low priority. Now, as more than 50 cities resume taxi services after a month-long suspension, China’s auto giants remain in the doldrums. 

EV startups taking the lead

However, there have been a few winners. Chinese EV darling Nio and the American carmaker Tesla have bucked the trend.

The US EV giant recently reported record-high first-quarter results but did not disclose figures for sales in China. However, according to figures obtained by CPCA, the company delivered 10,160 EVs in China last month. That figure made up over 20% of the country’s all-electric market, and Tesla trailed BYD—one of China’s biggest automakers—by just a few dozen deliveries.

Late last month, Tesla’s Shanghai Gigafactory achieved weekly production capacity of 3,000 Model 3s, and is poised to offload around 150,000 China-made EVs this year.

Nio, which has faced its share of struggles, also outperformed the country’s biggest manufacturers over the past three months. During the first two months of 2020, combined sales of its flagship ES8 SUV and smaller ES6 only decreased around 12% from a year earlier.

The fall was followed in March by a 12% year-on-year increase in deliveries to 1,533 vehicles. “All signs point to a much faster demand recovery in the premium segment versus mass,” Bernstein analysts led by Robin Zhu wrote in a research note on April 8.

This appears to explain Nio’s relatively strong performance in the crumbling market over the past few months. The company has beaten the giants in the Chinese luxury EV sector. Over the past year, sales of its ES6 came out ahead of Mercedes Benz’s EQC and Audi’s e-tron in China, according to official car registration data.

However, Tesla now poses a bigger threat. The China-made Model 3 and Y could take market share from Nio, preventing the Chinese EV maker from improving earnings, analysts at China’s Everbright Securities said in March.

Nio aims to sell 4,000 cars a month this year, which the company says could “basically support its operational targets,” including a double-digit profit margin in the fourth quarter. Bernstein analysts predict Nio sales will rebound in the second quarter as the pandemic fades. “But the threat of competition from Tesla will only become more pertinent over time,” they said.

Beijing’s bailout

The turnaround for smaller EV makers can be attributed in part to China’s push to revive its flagging EV sector.

Before the coronavirus outbreak, Beijing had already been fighting to keep its electric vehicle industry afloat. The sector had gone into drastic decline since June of last year, when authorities cut subsidies by up to 50% for EV purchases. The hope was that reductions would spur innovation in a sector many believed had become too reliant on government support.

But in early January, China’s industry minister said the country would suspend further subsidy reductions in order to counter the months-long slump. The announcement came 10 days before China’s economy was turned upside down by wide-ranging quarantines and stay-at-home orders to curb the spread of Covid-19. As infection rates soared, authorities shuttered production plants and closed brick-and-mortar stores. Although February is typically a slow month for China’s auto industry, the shutdowns led to an unprecedented decline in deliveries.

Beijing is now leading a sector-wide bailout of its EV industry by backtracking on plans to completely axe subsidies this year as well as lowering barriers to entry for new EV makers. The government hopes to restore growth in the world’s largest market for electrified transportation in an offensive that, at this stage, seems to be working.

As China moves closer to something resembling normalcy following the drastic disruption to the economy, the State Council, China’s cabinet, made a surprise announcement: Subsidies and tax breaks for EV buyers will remain in place until 2022. The government had originally planned to do away with them completely this year.

The communiqué, which came just two and a half months after regulators decided that no further cuts would be implemented in 2020, represent a dramatic shift in direction. After NEV deliveries slid by nearly 80% in February, authorities ultimately decided to take matters into their own hands instead of allowing the industry to stand on its own two feet.

Beyond subsidies

Postponing further subsidy cuts represents just one of the ways that Chinese authorities are attempting to restore the industry to its former glory and rescue automakers that have been deeply affected by the virus.

The country’s notorious production quota system is also reportedly being temporarily relaxed. The system has been used to drive EV production by requiring domestic automakers to follow strict guidelines on reaching EV building goals.

Bigger automakers—which have been some of the hardest hit in the past three months—may now be allowed to focus on better-selling gas-driven cars and to delay new EV launches in order to improve their dwindling cash reserves.

Local governments are also helping to bail out troubled automakers with massive cash injections. Nio has signed a deal with the government of Hefei, the capital of east China’s Anhui province, worth RMB 10 billion (around $1.4 billion). The long-awaited deal is expected to rescue the company from a liquidity crunch after months of no investment.

Meanwhile, the government of Henan province invested RMB 2.02 billion for a 60% stake in Shanghai-based EV maker Reech Auto. Although the company has yet to start producing vehicles, they have struck a deal with state-owned carmaker Changan to produce its vehicles.

Beijing is also making it easier for fledgling automakers to enter the market by lowering barriers to entry. The government will no longer insist that EV makers be capable of product development, according to draft changes to current policies released on April 7 by the Ministry of Industry and Information Technology. The measures had previously been put in place to calm a regulatory bubble that had seen nearly 500 EV companies established throughout China.