China slashes tax breaks for zombie models in new energy vehicle sector

Crackdown implemented to remove waste, boost efficiency and attract investment

A total of 1,882 electric cars were removed from the country's purchase tax exemption list, in an action that experts believe is the first in China's attempt to remove zombie companies from the sector and improve the investment environment.

The removed models were eligible for purchase tax exemption since before 2017, but have not been put into mass production, according to an announcement by the Ministry of Industry and Information Technology on May 22.

The models include those from BYD Auto, BAIC, JAC, Dongfeng Motor, and Brilliance Automotive. However, most were from little-known manufacturers.

China Business News cited an anonymous source at BYD Auto, who said the latest regulation won't have an impact on the company's business because the involved Qin and Song models were not planned for mass production.

This latest action is believed to be a follow-up from the ministry's announcement in April of tougher standards and regulations in the new energy vehicle sector, and enforced stricter supervision and inspections on the manufacturers.

"The country is cleaning up zombie automobile companies and models for a better environment to attract investment into the accelerating new energy vehicle sector," said Zhang Junyi, a partner at Nio Capital, a Wuhan-based new energy industrial investment enterprise.

He said there are many zombie companies occupying resources without substantially manufacturing electric vehicle products for customers, and are only surviving to lure investment.

On Wednesday, the National Development and Reform Commission released a draft automobile investment regulation to solicit opinions from related government agencies, local governments and the China Association of Automobile Manufacturers.

The draft regulation requires each province to remove all its zombie electric car companies and ensure others start mass production.

Electric car makers will need to have authorized or confirmed patents of invention and intellectual property rights in core technologies, as well as thorough research and development experience in design, testing, and prototypes.

The draft regulation also authorizes provincial governments to manage incremental investment into new energy vehicle projects, and provide permits for electric car startups.

Cui Dongshu, secretary-general of the China Passenger Car Association, said the draft regulation elevated the threshold to enter the new energy vehicle manufacturing sector with an aim to block misappropriating and cashing-out projects.

He said, "The requirement on the new electric car projects and the investors have leveled up, for only a few on-going projects realized mass production.

"The local governments will systematically manage the electric car projects, and secure their implementation."

The Chinese electric vehicle sector has been heating up in the past decade and attracted numerous investment with good and bad intermingled together, according to Cui.

"The coming regulation will prevent some investors leveraging the manufacturing project for misappropriating money or developing real estates," he added.

China is encouraging the use of electric vehicles by offering tax exemptions and discounts for car purchases.

The government expects the annual output electric vehicles produced to hit 2 million in 2020, and their sales to make up 20 percent of the overall auto market by 2025.

Shu Chang, a Shanghai-based partner of Roland Berger Strategy Consultants, said that the sector expects to nurture an electric vehicle ecosystem so as to provide better returns for investors.

"The new energy vehicle sector deserves a better environment because right now the winds are at their highest. Lots of money is invested into the electric car manufacturing business in China," he said.

China's electric vehicle market continued to grow in production and sales volume last month, thanks to continuous government support for green transport.

More than 82,000 electric vehicles were delivered in April, up 138.4 percent year-on-year, faster than the 117.4 percent growth rate in March, according to the China Association of Automobile Manufacturers.

China has remained the world's largest electric vehicle market for three consecutive years, with more than 777,000 electric cars sold in 2017.