China’s dominance in the EV space stems from two factors: its unbeaten manufacturing capacity and the long-term government support its EV industry has enjoyed since 2009. Two popular forms of the support have been the cash subsidies and purchase tax exemptions that every eligible new energy vehicle (NEV) buyer could avail of. These are what China likes to call battery EVs, hybrids and hydrogen fuel cell vehicles, and the former was up to 6% of an NEV’s cost; the purchase tax exemption was 10% of the retail price.

Yet, China announced in 2022 that NEVs would no longer be eligible for these two instruments at the end of the year. This caused a 38% drop in EV sales for January 2023 (fig. 1) and set off a war amongst its EV manufacturers on who could offer the biggest discounts.

Fig. 1: China NEV sales 2022 - May 2023 | Image: China Association of Automobile Manufacturers

This is interesting from two perspectives.

  • Subsidies are needed even in China
    The government support has been critical to growing EV sales even in the world’s largest domestic market for the technology. In fact, EVs (or NEVs) are on track to account for just over 50% of all automobiles sold in China and have thus surpassed the sales of ICEVs for the first time. At an annual figure of over 23 million cars sold in the country in 2022, that’s an impressive feat by any standards — and NEV sales saw an 83% jump y-o-y over 2021. The vehicles have also helped with China’s notorious air quality problems. Beijing, for instance, has reported a drop in its average AQI from 101.56 in 2013 to 31.74 in 2022 (fig. 2). It cannot be dismissed that the simultaneous growth in the city’s NEV registrations (table or fig.) have had a contribution.

    Fig. 2: Average annual PM2.5 air pollution levels in Beijing, China from 2012 - 2022 | Image: Statista

  • Customers are still price-sensitive
    About 70% of China’s public EV chargers are spread out over just a third of the country, and most of these are in the cities. However, urban China is expensive and reports suggest that a parking spot in residential complexes costs around $100/month. Having access to one with a dedicated charging point would possibly cost even more, and so any reduction to the subsidies immediately dents the ownership budget for the middle class EV owner. The impact is psychological as well since any buyer on a limited budget would have to think twice before buying an EV that is only best suited to urban use — unless the price differential with an IC-engined car is widened through incentives.

The situation is now changing though, as China announced in June 2023 that it would reinstate the road tax exemption from January 2024 and it would carry through to 2027. The exemption will be halved from January 2026, but given the industry’s growth trajectory and the interim support, the prospect of stabilising the country’s already dominant EV market seems a lot more assured.

India’s stance on EVs 

India’s EV sales have grown by 174% y-o-y in FY23 and the majority of it has come from e2Ws and e3Ws. But recent reports suggest that FAME-II subsidies have been cut for e2Ws and that the Karnataka government may remove the road tax exemption for EVs.

This would be counterproductive as EVs only accounted for 4.93% of the country’s annual auto sales in 2022. The industry relies heavily on subsidies and will do so till the price differential with ICEVs is eliminated. Even when that happens, EV automakers are fighting the customers’ ingrained familiarity with the IC engine and their range anxiety. The success with e2Ws goes to show that customers will buy an EV if it suits their budget and charging needs. For electric cars, though, the country must expand to well beyond the 6586 public chargers it has today, and the air quality benefits from a greater percentage of EVs in urban India should not be ignored either.

The situation with EVs is similar to what solar power faced in the late 2000s. Back in 2009 its tariffs were rather high and its prospects seemed feasible only with the government subsidy of Rs. 12/kWh. That the subsidy was made available at the right time was key to establishing solar in the country and it now leads price discoveries with the lowest tariffs ever recorded. Solar also attracts a huge majority of new energy investments.

India therefore needs to continue subsidising EVs. The segment is only just starting to go mainstream and deflating customer confidence at this time would set it back by several years.