(Bloomberg) -- China is considering a further reduction in electric-vehicle subsidies next year as the government pushes automakers to innovate rather than rely on fiscal policy to spur demand for alternative-energy cars, people familiar with the plan said.
The average purchase incentive per electric vehicle may be lowered by more than a third from the 2018 levels, said the people, who asked not to be identified disclosing information that isn’t public. Vehicles may be required to be able to go at least 200 kilometers (125 miles) on a single charge to be eligible for incentives, up from 150 kilometers currently, said the people. The plan is still under discussion and subject to changes, they said.
Subsidies have been key to making plug-in hybrids and EVs of companies such as BYD Co., backed by Warren Buffett, more affordable to Chinese consumers and helping the country surpass the U.S. as the world’s biggest in 2015. The central government spent 6.64 billion yuan ($1 billion) last year funding consumers’ purchases of such autos. On top of what the federal government spends, Chinese cities and provinces separately offer incentives to make electric cars more appealing in a country where automakers from Volkswagen AG to Ford Motor Co. are planning to increase EV offerings.
“China is switching away from carrots,” said Ali Izadi-Najafabadi, an analyst at Bloomberg NEF. “The government wants to ensure automakers will launch models that would be appealing to consumers hence setting subsidies contingent on minimum driving range requirements.”
The National Development and Reform Commission, an auto industry policy maker, didn’t immediately respond to a fax seeking comment.
Shares of EV maker BYD closed 0.6 percent lower in Hong Kong trading, after gaining as much as 2.8 percent earlier in the day. Guangzhou Automobile Group Co. declined 2 percent.
The government is scaling back subsidies to place more emphasis on the need for technological improvements to ensure the industry’s long-term success. As part of new rules that went into effect on Feb. 12, China lowered subsidies by varying degrees for EVs with a driving range of less than 300 kilometers. At the same time, the incentive for those that have a range of 400 kilometers and beyond was raised to 50,000 yuan.
“Government policy has a huge impact over the new-energy vehicle sector and every adjustment made on the policy front over the next two years will result in tremendous changes in the industry,” Li Yixiu, sales chief for Beijing Electric Vehicle Co., China’s biggest maker of pure electric cars, told reporters on July 5.
“We believe there isn’t a chance for carmakers to raise prices to make up for the reduction of government fundings,” Li said. “Instead, we have to come up with competitive new products and services to respond.”
BJEV, as the company is known, started offering battery-swap and rental services to consumers this week to help lower purchase costs and ease range anxiety. The company sells a version of its EV300 compact car for 79,800 yuan that allows users to change batteries as often as they want for a monthly fee of 432 yuan.
The century-long dominance of gasoline-engine cars will sputter in coming decades as incentivized Chinese buyers and more-efficient manufacturers combine to put EVs atop the sales leader board.
By 2040, more than half of all new car sales and a third of the planet’s automobile fleet -- equal to 559 million vehicles -- will be electric, according to a global outlook published by BNEF in May. EVs will achieve upfront cost parity with internal-combustion engines beginning in the mid-2020s, helping trigger a tectonic shift in car sales, it said.
“There has been a spurt of innovation in the industry,” said Steve Man, a senior autos analyst for Bloomberg Intelligence in Hong Kong. “This is a much needed transformation for the Chinese EV market.”
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