China's subsidy cuts on new energy vehicles will pressure market: S&P
HONG KONG - S&P Global Ratings said today that China's further cuts to subsidies on new energy vehicles (NEV) will increase pressure on the country's evolving and highly-competitive car market. However, given that NEVs make up a small proportion of current sales, subsidy phase-outs are not the biggest challenge on the horizon for rated Chinese car.
China announced on March 26 that it would begin another round of NEV subsidy cuts, slashing 2018 entitlements by up to 60% per car sold beginning June 25, 2019. The aim is to completely withdraw such support by 2020.
"For our rated auto manufacturers, the NEV business represented less than 5%-8% of total sales volume at end-2018," says S&P. "The competitiveness and financial position of these companies will not be materially affected by the phase-out of subsidies.
"In our view, the bigger challenge is meeting standards to lower fuel consumption on vehicles, along with targets that NEV credits make up at least 10% of production volume in 2019, and 12% in 2020.
"This is requiring high capital expenditure and research and development to upgrade product technology and roll out more NEVs. Companies that fail to meet such targets will have to buy credits from those that have them."
S&P says it believes the entry of competitive foreign NEV brands in China is more of a potential risk to profitability than the subsidy cuts.
"In our view, NEVs and related subsidies are not the main drivers of profitability in the current year." www.standardandpoors.com (ATI).