China's electric vehicle sales will continue boom despite subsidy cuts, Fitch says

Key Points
  • Electric car sales in China jumped almost 62% in 2018 according to official figures.
  • But Beijing is set to reduce its subsidies to buyers.
  • But Fitch Ratings says the showroom price will likely remain at a similar level.
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Booming growth in China's electric vehicle (EV) market won't slow because of Beijing's drastic reduction in subsidies, according to Fitch Ratings.

Electric car sales in China jumped almost 62% in 2018 to 1.3 million vehicles, according to China's Association of Automobile Manufacturers. The same organization sees electric vehicle sales hitting 1.6 million this year.

But the Chinese government has recently raised the bar for electric cars that qualify for subsidies and reduced the amount it is willing to provide to relevant companies.

New rules issued on March 26 will see central government subsidies totally removed for EVs with a range below 155 miles (250 km). More expensive electric vehicles with higher specifications will see the incentives slashed by as much as 60%.

At the same time, authorities have used law to pass the responsibility for pushing new energy vehicle sales away from government and onto car manufacturers based in China.

Chinese electric carmaker BYD Co, backed by Warren Buffet, saw its shares slump last week after admitting that the new rules had affected first-quarter sales.

But Fitch said Monday that the ticket price of an electric car in China is unlikely to surge as manufacturers will subsidize customers and pass on at least some of the losses to suppliers. The agency believes EV makers will continue to "prioritize volumes and market share over profitability."

The new rules come in to force on June 26 and Fitch expects the transition period will "pull forward" a burst of buying.

"Similarly, a four-month transition period for a subsidy cut in 2018 boosted EV sales by 123% year-on-year in February to May, before growth moderated to 60%-85% year-on-year in the subsequent months," Fitch said in its note.

Fitch analysts warned that while consumers shouldn't be affected by the removal of government subsidies, some China-based automakers would likely suffer a drain on cash flow as the investment cost in their EV businesses continued to rise.

The agency forecasts China's EV market will grow over the medium term as the coming launch of more attractive products in 2019 boosts consumer demand.