The Chinese EV Dilemma: Subsidized Yet Striking

Revised: June 28, 2024

This blog post has been updated to incorporate newly identified data and information. We appreciate the feedback from readers of the original post issued on June 20, 2024.

Trustee Chair in Chinese Business and Economics  >  Trustee China Hand

Introduction

The global war over electric vehicles (EV) has heated up in the past few weeks and threatens to get even hotter in the coming months. On June 12, 2024, the European Commission announced provisional penalty tariffs ranging from 17.4% to 38.1% against EVs imported from China. The European Union’s (EU) move to counter Chinese subsidies followed the Biden administration’s imposition of tariffs in mid-May against a range of high-tech products from China, including 100% tariffs on EVs and 25% on EV batteries. 

This should come as no surprise to anyone. In our 2020 report, The Coming NEV War?, I speculated that the relative calm at that point – when China was exporting only a small number of cars which were mainly going to Bangladesh and India – could give way to greater tensions. 

China’s trading partners argue that these tensions are the result of Chinese industrial policy and unfair trade practices. China argues that its growing exports reflect the country’s natural comparative advantage and the high quality of its companies’ products. The reality – and what makes this a difficult challenge – is that there is some truth in both perspectives. Chinese EVs have benefitted from massive industrial policy support, and their quality is improving, making them attractive to domestic and overseas consumers. An effective response by the U.S., Europe and others must take account of both facts. 

Industrial Policy Support 

China has used a wide range of tools to promote the EV sector. These include regulatory changes such as the “dual-credit system,” which has pushed automakers to have a growing share of their fleets be electrified and to make license plates for EVs easier for consumers to obtain than for internal-combustion engine (ICE) vehicles. But these measures would be irrelevant without substantial financial backing. The Trustee Chair made estimates in 2018, 2020 and 2022 of Chinese industrial policy spending for the sector. Following this original methodology (but with some slight corrections), we have updated the data through the end of 2023 (see Figure 1). 

Figure 1: Industrial Policy Spending for China’s EV Sector    (US$, billions)

From 2009 to 2023, we calculate that Chinese government support cumulatively totaled $230.9 billion. Absolute funding annually was around $6.74 billion in the first 9 years of our analysis (2009-2017), as the sector was just getting off the ground. Spending roughly tripled during 2018-2020, and then has risen again sharply since 2021. 

These estimates reflect the combination of five kinds of support: nationally approved buyer rebates, exemption from the 10% sales tax, government funding for infrastructure (primarily charging poles), R&D programs for EV makers, and government procurement of EVs. The buyer’s rebate and sales tax exemption have accounted for the vast majority of support for the industry (see Figure 2). That said, because of the high cost and desire to winnow the field of producers, the central government reduced the buyer’s rebate in 2022 and eliminated it beginning in 2023. 

Figure 2: Composition of Chinese Industrial Policy Support (%)

Many parts of the data present challenges to researchers. Two stand out. One is about the data on annual sales of EVs, which is needed to make several of the estimates. We rely on the China Association of Automobile Manufacturers (CAAM) rather than the China Passenger Car Association (CPCA) because CAAM has consistent series of data on both passenger and commercial vehicles. 

A second question concerns the sales tax exemption. The State Tax Administration (STA) reported that sales tax exemptions in 2022 were RMB 87.9 billion ($13.0 billion) and RMB 121.8 billion ($17.2 billion) in 2023. This is lower than our estimates of $30.3 billion and $39.6 billion for 2022 and 2023, respectively. 

Although the STA figures could be considered authoritative, the STA has yet to provide annual data for previous years or explain their underlying assumptions, making it difficult to precisely calculate the sales tax exemption for each and every year and analyze trends over time. Because we place a high premium on consistency across time and our own estimation method aligns with the government’s stated policy, we still calculate and utilize on our own sales tax exemption estimates. That said, if one used the STA reported figure for 2023, total state support combining the five categories would be $22.9 billion, just over half our estimate of $45.3 billion. For 2022 the respective totals would be $28.6 billion instead of $45.8 billion. The best way to resolve questions of data accuracy would be for Chinese authorities to provide a more comprehensive reporting on data for the various elements on an annual basis back to 2014. 

Even with these ambiguities, in our view, these data still constitute a conservative estimate, as they do not include four other kinds of support, which together could potentially rival the scale of funding identified above. First, despite the change in national policy, some localities – including Shanghai, Shenzhen, and Changping District in Beijing – have created modest rebate programs, mainly to encourage ICE owners to switch to EVs. Because it is difficult to obtain a full picture of this support across regions and over the years and these appear to be relatively small programs, this is left out of our estimates. Second, low-cost land, electricity, and credit are not included, primarily because it is extremely difficult to calculate their overall value with any precision. But we know this kind of support is significant and could be critical for some individual EV makers. A recent World Bank report (p. 39) indicates that in 2022 the auto sector as a whole received loans with interest rates of roughly 2%, half the weighted average for all commercial and industrial loans. 

Third, although there is not a national EV fund, as there is in semiconductors, it is likely that municipal and provincial governments have directly invested in the EV sector, either to create new producers or invest in existing ones. The most prominent example is NIO, which in 2020 received an RMB 5 billion injection from the Hefei municipal government in exchange for a 17% stake in the company’s core business. Hefei later cashed out most of its holdings in 2022. 

Finally, our estimate does not include subsidies for other parts of the supply chain, including for miners and processors of raw materials, chemicals producers, and battery manufacturers. According to the annual reports of CATL, which in 2023 held a 43.1% share of the Chinese market and 36.8% of the global market, its government subsidies have risen from $76.7 million in 2018 to $809.2 million in 2023 (see Figure 3). EVE Energy, which ranks 4th in China, pulled in $208.9 million in subsidies in 2023.

Figure 3: Government Subsidies to CATL (US$, millions)

These additional kinds of funding are cumulatively substantial, with low-cost credit and equity investment likely being the most impactful for EV makers. Growing subsidies to battery makers may mean an overall shift to greater relative support for them.

There are at least two different ways to interpret the data on industrial policy support for EV makers. China’s trading partners could point to 15 years of sustained regulatory and financial support for domestic producers, which has fundamentally altered the playing field to make it much harder for others to compete in China or anywhere else where Chinese EVs are sold. By contrast, defenders of China could point out that the data show that subsidies as a percentage of total sales have declined substantially, from over 40% in the early years to only 11.4% in 2023, which reflects a pattern in line with heavier support for infant industries, then a gradual reduction as they mature. In addition, they could note that the average support per vehicle has fallen from $13,860 in 2018 to just under $4,800 in 2023, which is less than the $7,500 credit that goes to buyers of qualifying vehicles as part of the U.S.’s Inflation Reduction Act. 

Although both perspectives have potential merit, I lean toward the former for three reasons. First is the cumulative effect of 15 years of state support and the likelihood that our data still do not account for other elements of industrial policy aid, which would translate into a higher subsidy rate as a proportion of overall sales and per vehicle.

The second is that even after all this time, there are 200 EV producers in China, who collectively have created far more capacity than the domestic market can bear. Not surprisingly, production has expanded rapidly, leading to growing inventories. As a result, firms have engaged in a bitter price war at home and expanded efforts to promote exports. According to the International Energy Agency (IEA), in 2023 “China used less than 40% of its maximum cell output, and cathode and anode active material installed manufacturing capacity was almost 4 and 9 times greater than global EV cell demand in 2023.” 

And third, despite the extensive government support and expansion of sales, very few Chinese EV producers and battery makers are profitable. In a well-functioning market economy, firms would more carefully gauge their investment in new capacity, and the emergence of such a sharp gap between supply and demand would likely result in industry consolidation, with some mergers and acquisitions, and other poorly performing companies leaving the market entirely.

In this context, given Chinese EV makers’ scale and reach, it is difficult for other countries’ producers who face tighter budget constraints to effectively compete. My guess, though, is that the endurance of these subsidies is unlikely part of an intentional plot for global domination of this industry and instead a byproduct of China’s inefficient industrial policy system in which support typically extends too long and is spread overly widely, a pathology visible in both tradable and non-tradable industries.

Striking Quality

If Chinese EVs were pieces of junk, then they would not be a serious challenge to the rest of the world’s automakers. For many years Chinese auto firms languished far behind the global trendsetters in Europe, East Asia and North America. But Chinese firms have narrowed the gap in autos in general and moved ahead in EVs. 

There certainly has been substantial technology transfer through the joint ventures that China has required since the mid-1990s. Although China formally removed caps on joint-venture (JV) equity ratios held by foreign companies in 2022, according to the American Chamber of Commerce in China, foreign producers in reality face difficulties in gaining a majority share of their JVs, buying out their Chinese partners, or establishing new wholly-owned subsidiaries in China (with Tesla being the most notable exception). That said, recent progress has been led not by JVs, but by independent private Chinese firms, including BYD, Geely, Great Wall, NIO, Li Auto, and XPeng. They have developed their own engineering and design capabilities as well as benefited from the guidance of global auto consulting firms, and overseas partnerships, such as Geely’s ownership of Volvo. Equally important, the move from internal combustion engines (ICE) to electric motors has radically reduced the technology threshold, making it possible for start-ups from the information technology (IT) sector to make a splash. And so, although there is a long tail of “also rans,” companies with low-quality vehicles, China’s leading automakers have made enormous strides and can’t be pegged as copycats or be relegated to the lower end of the market. 

Independent auto analysts and Western automakers with whom I’ve spoken all agree that Chinese EV makers and battery producers have made tremendous progress and must be taken seriously. The energy intensity, range and reliability of Chinese EV batteries have risen significantly in the past few years, while the overall design, infotainment systems, and autonomy capabilities of Chinese models have advanced. 

Such progress was visible in trips the Trustee Chair team made to China this Spring (see Figure 4). With their green-shaded license plates, EVs accounted for a high proportion of cars on the road in every city we visited. Showrooms featuring a wide range of brands were usually crowded with curious shoppers. Factory visits were even more revealing. Battery makers Gotion (based in Hefei, Anhui) and SVolt (headquartered in Changzhou, Jiangsu) have huge plants that are highly automated, which they claim translate into low error rates, improved quality, and rapid production. Both produce batteries with a range of chemistries, have built multiple facilities around China and abroad, and engage in extensive R&D on solid-state batteries and other potential technologies. 

Figure 4: Various Chinese EV Brands

NIO, founded in 2014, has gone from originally outsourcing production to Hefei-based automaker Jianghuai (JAC) to fully taking over that plant. It now also has other specialized production and R&D facilities, and its subscription service for replaceable batteries has expanded and is a model that others may adopt. In March, electronics producer Xiaomi came out with its first EV, the SU7 sedan, soon after news broke that Apple was shelving a similar initiative. Their Beijing factory, which has received some government support, includes every element of production, from the casting of the chassis through the assembly of the body, installation of the interior, and painting. Xiaomi representatives highlighted their efforts to make the chassis more stable, the motor more powerful and battery safer than their competitors. Time will tell if these claims are justified, but orders reportedly topped 100,000 within the first day of sales. 

Beyond whatever state support they have attracted, improving quality, sales momentum at home, and the potential opportunities for overseas markets give Chinese entrepreneurs a sense of confidence and faith that they can outlast their rivals, reinforcing their preference to press ahead and not pursue consolidation or exit the market.

Policy Implications

China’s move into EVs has been incredibly risky, and many of the companies currently garnering headlines likely may not survive the current “Warring States” era marked by cut-throat competition at home and growing protectionism abroad. Nevertheless, the move away from traditional ICEs to EVs seems assured, and some Chinese auto and battery makers will assuredly be mainstays in the global industry. As a result, Western governments need to carefully evaluate the pros and cons of both their defensive and offensive policy options.

A fundamental question for Western governments is whether they see any place at all for Chinese EVs in their markets and as part of the global effort to decarbonize, and if not, what lengths they are willing to go to stop them. Despite both raising tariffs, the U.S. and EU are taking different approaches.

The EU launched a formal anti-subsidy investigation, and its initial penalties reflect specifically identified subsidies, which vary by producer. Final duties will be announced by November 4, coincidentally the day before the U.S. Presidential election. By contrast, the U.S. moves were done within the scope of the Trump administration’s original Section 301 investigation, which was framed as countering Chinese intellectual property (IP) theft. The 100% penalties do not appear to be based on an analysis of specific Chinese subsidies, but instead likely reflect a rough estimate of how high tariffs would need to be to dissuade Chinese producers from even contemplating exporting their vehicles to the U.S. at all. (This approach seems somewhat similar to a recent analysis conducted by the Rhodium Group on the price advantage of Chinese EV makers.) Relatedly, although it may matter little to Washington, the WTO ruled in 2020 that the Section 301 tariffs violated the U.S.’s WTO obligations; hence, expanding their use may draw criticism even from allies who are worried about the further erosion of the international rules-based order.

Moreover, while the EU has suggested it is open to investment by Chinese EV makers and battery producers (which would mean more jobs in the EU and put their own automakers on a more level playing field at home), the U.S. has given the opposite sign. Greenfield investment is not explicitly banned in the U.S., but critical statements by some members of Congress and by local officials, combined with a Biden investigation into the potential national security threats of connected vehicles from China, collectively raising the risks for both Chinese investment in the United States as well as for global automakers who source components and systems from China destined for cars sold in Western markets. 

As contentious as the defensive side of the equation is, it is the offensive side of the ledger that will ultimately prove most important. In our 2020 report, we highlighted seven policy initiatives: 

The to-do list has not changed. There are some exceptions, but in general Western automakers and governments have dilly dallied and not been aggressive enough. The IRA framework is constructive, but its eligibility requirements for full rebates are too narrow. Although emissions standards have been raised, there is still insufficient pressure on automakers to electrify their fleets and issue more affordable models. Moreover, charging options are still far from ubiquitous, which is necessary to soothe range anxieties that depress purchases at all levels of the market. The recent announcement by General Motors that it will fully electrify by 2035 sets an ambitious long-term goal, but it creates room for a slower rollout pace in the near term. 

The U.S. the E.U, Japan, and South Korea need to ramp up coordination on EVs on both the defensive and offensive sides of the equation in order to effectively advance their domestic industries, promote decarbonization, and protect their national security. Even if the sense of unfairness over Chinese industrial policy and national security fears are justified, Western countries need to determine whether the goal is to shut Chinese producers out of Western markets entirely or to maintain some sort of a global industry, with Chinese and Western producers having access to each other’s markets as long as they meet certain standards regarding fair competition and national security. If the answer is not outright separation, then Western countries will not only need to set common standards but at some point negotiate a sustainable framework with China. Moreover, it is clear that the U.S. and others will not advance their interests without more aggressive efforts to develop their own industries by fostering high-quality, affordable EVs that can access a ubiquitous and dependable charging infrastructure. In short, on both the defensive and offensive sides of the EV competition, time is of the essence. 

Related Trustee Chair Activity: 

Ilaria Mazzocco, Balancing Act: Managing European Dependencies on China for Climate Technologies, CSIS Brief, December 13, 2023. 

Ilaria Mazzocco and Gregor Sebastian, Electric Shock: Interpreting China’s Electric Vehicle Export Boom, CSIS Brief, September 14, 2023. 

Gerard DiPippo, Ilaria Mazzocco, and Scott Kennedy, Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective, CSIS Report, May 22, 2022. 

Scott Kennedy, “Careful Connectivity: Responding to China’s AV Drive,” CSIS Commentary, October 15, 2021. 

Scott Kennedy, The Coming NEV War? Implications of China’s Advances in Electric Vehicles, CSIS Brief, November 18, 2020. 

Scott Kennedy, China’s Risky Drive into New Energy Vehicles, CSIS Report, November 19, 2018.