The announcement on September 9 that China is studying the timeline to phase out production and sales of conventional fossil-fuel powered cars shows the government’s commitment to the EV market, but faces challenges and uncertainties in being realized, according to analysts with Wood Mackenzie’s Asia Pacific refining team.
The comments came from Guobin Xin, vice minister of China’s Ministry and Information Technology, made at an innovation-themed auto industry forum in Tianjin.
“His speech has attracted wide media coverage, understandable given the scale of China’s auto market and its growth potential,” WoodMac’s Feng Fu and Yujiao Lei wrote in a research note.
“Our base case forecasts China’s car fleet to grow from 160 million in 2016 to 390 million in 2035, which will drive the fleet’s fuel demand (mainly gasoline) from 2.8 million b/d to 4.2 million b/d over the same period. Car sales are currently around 25 million per annum, of which around 300,000 (close to 2%) are EVs. We expect China’s car sales to reach 32 million by 2035, with EVs accounting for 5 million or 15% of total sales in our base case.”
Xin did not provide any further details to his comments, the analysts wrote, adding that notably, he did not refer to any timeline associated with the considered ban.
“If we assume the sale of conventional cars (including hybrids) is banned by 2035, 1.9 million b/d of fuel demand would be at risk by 2035. This assumes a faster ramp up of EV sales between 2020-2035 than in our base case, with an EV penetration of 5% in 2020, 20% in 2025 and 50% by 2030,” the analysts wrote.
“The world's largest electric car market, China has already set ambitious goals. It aims to have 5 million electric cars on the road by 2020 and 20% of new car sales to be electric cars by 2025. As such, this latest statement is by no means astonishing, but does reinforce the government's ambition to promote EV growth.”
But the goal faces headwinds.
“Direct government EV subsidies are being phased out by 2020, which is posing a risk to EV sales. The phasing out of subsidies has already slowed growth in recent months, since falling battery costs cannot offset the incremental costs. At the same time, it is hard to roll out purchasing and driving restrictions on combustion-engine cars to more cities . As government subsidies still play an important role in supporting EV sales, we believe the market response will lag five to ten years behind any government target without further policies to fill the gap.”
It is also worth noting the development and implementation of related policies has not been a smooth process to date, the WoodMac analysts note.
“Details of the new corporate average fuel consumption and the parallel zero-emission car credit systems are still being discussed, and their implementation has been postponed. Whether this latest statement leads to action that will narrow the gap between the official target and the market response remains uncertain.
“Given the lack of clarity in Xin's speech about the timeline and the definition of cars being targeted, the viability of any ban on combustion-engine cars remains to be seen.”