Does China subsidize EVs? - Part 1
Charts this week 13
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This is part 1 of a two part series on subsidies and industrial policy. Part 1 looks at David Fickling’s piece from last week that some China boosters on X were using as evidence that China’s subsidies to EVs are relatively lower than US/EU and, thus, a big non-issue. Part 2 will consolidate some of my views on industrial policy more generally, what works and why.
TLDR
Yes, China does subsidize EV sector
Tariffs are a useful tool, but can’t replace good ol’ hard work
We are capable of doing amazing things
What EV subsidies?
David Fickling has written a nice opinion piece1 looking at “declared” subsidies of EV makers around the world. (Declared is an important word here.) He concludes that the excessive subsidies are non-existent for Chinese EV makers, with a “right now” caveat:
Look through the accounts of the major export-oriented Chinese carmakers, and you can see how little the narrative matches reality. The main support that’s typically pointed to comes in three key areas: direct subsidies, generous tax treatment, and artificially cheap credit. Right now, there’s very little sign these are making a difference.
As usual, David has great charts in his piece.
Above chart shows declared subsidies amounts for 1 year. A quick search online shows China began EV industry subsidies in 20092 3, a whopping decade-and-a-half ago.
Since 2009, the Chinese government has invested over $231 billion in the EV sector, supporting research, development and infrastructure including setting up charging stations. - Inside China’s Electric Vehicle Revolution: A Closer Look
Let’s say that again, since 2009 China has cumulatively invested over $231 billion in the EV sector. Does it make sense to look at the top 5 producers’ one-year accounts and say, hey what’s the big deal? 🤔 Hmm… perhaps there are some lessons on industrial policy the West can learn (more in Part 2).
Okay, next chart.
Read the note. Here David is looking at the gap between the 5-year aggregate pre-tax income and net income. It should show (very roughly) the effective tax rate.
Let’s take a quick look at BYD’s 2023 annual report. In the income statement we see two lines with taxes:
Income taxes: RMB 5.9 Billion, or 15.9% of pre-tax income (which fits with China’s 15% for state supported industries that David mentioned).
Tax and surcharge: RMB 10.3 Billion4
Combined that’s RMB 16.2 Billion. Sizeable, right?
Well, not so fast. Chinese companies often have tax adjustment accounts on their cash flow statement. So we got to look there too, and—WHOA!
Here we see RMB 15.1 billion of “tax rebates received” (no footnote explanation, convenient?). That’s about 93% of their combined income tax and taxes and surcharges from their income statement—interesting! 😭Sorry, this looks like a significant tax subsidy to me.
Next chart.
David’s argument here is when looking at the WACC (weighted average cost of capital), BYD and others are not much lower than other automakers. That’s all fine and well, WACCs are comparable. 👍
But the argument about subsidies is about cheap access to State-owned bank financing. China’s 1-year and 5-year loan prime rate (LPR) is fixed at around 3.1% and 3.6%, respectfully. It looks like the majority of BYD’s bank borrowings are short-term5 (within 1 year) so the 3.1% rate is more comparable. My quick review of BYD’s 2023 annual report didn’t turn up interest rates on their borrowings, but David has 1.99% which is well below the LPR. That looks like state-supported lending (read: another subsidy).
Having reviewed the data, David believes China does not currently use excessive subsidies for EVs. I’ve shown that’s not necessarily the case.
Focusing on current tariffs ignores decade+ of $230 billion China’s state invested supporting the industry.
Tax subsidies still exist and they are significant!
Access to cheaper credit (than their domestic market’s norm) still exists. **This is why households and SMEs outside encouraged industries are the bagholders.
David’s final conclusion is still a great one. I quote him:
Auto executives, at least, show signs of resisting that defeatist narrative. In Europe, carmakers showed a dazzling range of affordable, interesting electric vehicle designs at the Paris auto show last month. In the US, Ford’s new mid-sized electric pickup is a game-changer that “matches the cost structure of any Chinese auto manufacturer building in Mexico in the future,” Chief Executive Officer Jim Farley told investors on an earnings call last week.
It would be good to see more of that spirit. China is a formidable competitor in the clean technology race, matching the net-zero commitment of the European Union to the fiscal power of the US, combined with a level of centralized policy direction and sheer economic scale that neither market can quite match. It’s not impregnable, however, and its rivals will be best-placed for the long term if they try to compete, rather than shutting themselves away behind tariff walls.
In other words: Work hard to compete, rather than erect protective tariff barriers.
I HARD AGREE with the work hard to compete part. See the video in “Inspirational story” section below!
I still think we need tariffs. China’s subsidies are currently quite a bit higher than David thinks, see the list below for additional subsidies and policies that support(ed) EVs. Tariff rates should probably equalize on pricing AND have gradual reductions built in to incentivize affordability goals. Any funds raised from tariffs should probably be invested in the sector too (perhaps in charging stations?). Disclaimer: I’m not a trade economist or trade policy wonk.
List of additional subsidies & policies benefitting China’s EVs
Consumption subsidies (effectively lowering the price of EVs)
No license plate restrictions — In many T1 cities in China, where people could afford the earlier (read: more expensive) EVs, there are license plate lotteries or long wait times for a new plate. These were waived for EVs. EV buyers could get a plate immediately.
State funds to build out charging network — Can you drive an EV if you don’t have a place to charge it?
Free or discounted land — That old one. China’s State owns nearly all land in China.
Discounted electricity — State owns the electricity grids and can set preferential pricing.
Preferential access to resources — further aided by state stock piling.
Subsidies to suppliers (lithium producers, battery makers, aluminum, steel—you get the point).
Effectively closed market for foreign EVs — no state subsidies for foreign EVs for a long time
An Inspirational Story
FDR & Ford story from Tim Hade at DERVOS
Fellow substacker DER Task Force’s post here shared a great story about FDR & Henry Ford overcoming their dislike for one another and their political differences and executing on an urgent plan to help America (and the world).
My favorite story, and maybe I think most relevant to today’s environment, is a story I learned when I was at the Air Force Academy. And it goes something like this.
In 1940, the German ambassador walked into FDR’s office for a meeting. And he basically said some version of, “look, we’re Germany and we produce 10 bombers a day. And you’re the United States and you produce one bomber a day. And so don’t fuck around.” That was kind of the message from the German ambassador to FDR. So FDR said, “all right, that’s a good point.” So he got on a plane. He flew to Detroit. And he met Henry Ford, who was the genius titan of the world’s most innovative car company at the time. Go figure.
And Henry Ford and FDR hated each other. In fact, for like 25 years prior to World War II they didn’t talk. They didn’t get along. They didn’t like each other. They had totally diametrically opposed views to government and the role of government and all this type of stuff.
And they sat down at a table and they talked about World War II and what it meant to America. Two years later, Germany was still producing 10 bombers a day, right? And Henry Ford’s Willow Run plant was producing a bomber an hour. One bomber an hour.
And so, like, everything about this situation for us is intimidating. And I get that. But we are capable of doing amazing things, and this facility [Brooklyn Naval Yard] is a constant reminder of that. We know for sure that alone we will fail. But together, we have the opportunity to execute the greatest technological transition in the history of humankind. So welcome to Dervos.
-Tim Hade
Watch the full video clip below (2m13s).
DER stands for Distributed Energy Resources. Give DER Task Force a follow or subscribe. These guys are doing great work! Full post link below.
"How can He sweeten the bitterest providences, and give us cause to praise Him for dungeons and prisons! What a table was here spread for me in a wilderness, where I saw nothing at first but to perish for hunger!" — Daniel Defoe, Robinson Crusoe
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Since buying an EV costs more than buying a conventional internal combustion engine (ICE) vehicle, in 2009 the government began to provide generous subsidies for EV purchases.
China’s transition to electric vehicles | MIT Energy Initiative
Since 2009, the Chinese government has invested over $231 billion in the EV sector, supporting research, development and infrastructure including setting up charging stations. This financial backing has allowed local makers to produce affordable electric vehicles, so the entry barriers for consumers are lower.
Here’s the breakdown if any accounting nerds are reading.
Here’s the footnote:
