“New energy passenger car industry will experience an industrial shuffle in next 5-8 years,” said Li Shupeng, president of Zhongtong Bus Holding Co., Ltd. (000957.SZ), in an interview of National Business Daily on June 2.
Li’s prediction came after new rules on subsidies for new energy vehicles released at the end of 2016 put forward new requirements for new energy vehicle enterprises which apply for subsidies in terms of energy consumption and driving range of cars.
The new rules have taken effect now. The first quarterly report in 2017 of enterprises engaged in new energy passenger vehicle showed that their performance declined in the first quarter. Operating revenues of Xiamen King Long Motor Group Co., Ltd. dropped by over 60 percent year on year. Industry insiders told the reporter that as subsidies for new energy vehicles will be liquidated every year, requirements on company’s capitals are also stricter as sales of new energy passenger vehicles increase.
In view of these reasons, Li believed that the number of new energy passenger car enterprises will reduce by over 80 percent after industrial shuffle.
It takes over 1 year to get subsidies
Although cheat on gaining subsidies for new energy vehicles was exposed in 2016, the industry has been mentally ready for stricter and higher standards for the subsidies. But influence of new rules on the industry beats expectation.
“Some experts thought that market size of new energy vehicle will shrink by 15 percent this year.” But Li believed that actual situation may be much worse than this and indicated that it may drop by 30 percent.
Noticeably, 517,000 units of new energy vehicles were produced and 507,000 units were sold last year, representing a year-on-year growth of 51.7 percent and 53 percent respectively, according to statistics from China Association of Automobile Manufactures (CAAM). But according to an announcement of the Ministry of Industry and Information Technology (MIIT) on May 17, the number of vehicles gaining the subsidies was less than 20 percent of total sales of last year. Enterprises applied subsidies for 94,000 units of new energy vehicles in 2016, but expert group only approved 85,000 units.
“Only 85,000 units of cars meet requirements on the first batch of subsidies, which is really out of my expectation. It indicates that the country’s review on new energy vehicle is much stricter than expected,” said Cui Dongshu, secretary general of China Passenger Car Association (CPCA).
Besides change in the number of new energy vehicles, requirements on capitals of enterprises were also raised in the new rules.
In order to avoid cheat on subsidies, the MIIT released a circular on December 29, 2016, requiring that when applying for subsidies, actual service life of the new energy vehicles which bought by non-personal users should reach 30,000 kilometers (except special vehicles for operation) from January 1, 2017 on.
“It will take us more than one year to get the subsidies according to the requirement about 30,000 kilometers.” Li remarked that it imposes higher requirement on capitals of manufacturers.
At present, a total of over 80,000 units of cars were qualified for subsidies last year, only accounting for 16 percent of total new energy vehicles sales of the year. The remaining new energy vehicles may be qualified for subsidies in the second half of 2018, according to a research report of Shenwan Hongyuan Securities.
An industry insider pointed out that as subsidies for new energy vehicles will be liquidated every year, requirements on company’s capitals are also stricter as sales of new energy passenger vehicles increase.
For example, BYD Company Limited announced at the evening of May 16 that its holding subsidiary BYD Automotive Industry Co., Ltd. made additional investment worth 500 million yuan in Shenzhen DENZA New Energy Automotive Co., Ltd. so as to ease pressure from adjustment of subsidy policy.
Industrial shuffle expected to take place in next 5-8 yrs
In the opinion of Li, the new rules will accelerate polarization of the industry. In order to solve difficulty in funds, large enterprises will explore new financing channels to lower debt-to-assets ratio and improve financial structure, but the small ones might thus quit the market.
“The industry is supposed to see a shuffle in 5-8 years.” Li added that there are about 50 new energy passenger vehicle enterprises right now and it will be very good if 8-10 enterprises are left after the industrial shuffle.
Since the beginning of this year, new energy vehicle market has made response to change in subsidy policy and list of vehicles to be popularized. Sales of new energy commercial cars dropped by as high as 71.6 percent in the first four months of this year, based on statistics from CAAM.
Although it was favored by capitals before, contraction of investment in new energy vehicle isn’t rare in recent two years. However, Li viewed that the new energy vehicle market still boasts huge potential in the long run. Even if there’s no subsidy in the future, it won’t exert bigger influence on sales of new energy vehicles. According to statistics of Zhongtong Bus Holding, sales of new energy vehicles of the company exceeded 14,000 units in 2016, accounting for above 80 percent of the company’s total sales, and contribution ratio to profits reached 90 percent.
Li illustrated to the reported that passenger vehicle market is a completely market-based industry. “If about 230,000 units of cars are needed each year, it means the industry has been a mature period.
However, due to decline in subsidies for new energy vehicles at the beginning of this year, operating revenues and net profits of passenger vehicle enterprises such as Zhengzhou Yutong Bus Co., Ltd., Zhongtong Bus Holding and Xiamen King Long Motor Group dropped remarkably in the first quarter. Operating revenues of Zhongtong Bus Holding and Xiamen King Long Motor Group plunged by 49.15 percent and 62.01 percent respectively.
In the opinion of an analyst from automotive industry, performance of new energy passenger vehicle enterprises slowed down in the first quarter owing to change in subsidy policy. This required them to seek for new growth driver.
As for this, Li pointed out that with promotion of the Belt and Road Initiative, China witnesses structural adjustment and switch of old and new economic drivers. Switchover in new energy industry has become a trend.
“Labor cost will be one of big advantages for exports.” Li said that labor cost of passenger vehicles of Zhongtong Bus Holding is 200,000 yuan cheaper than that of European auto brands.
Translated by Vanessa Chen