Tesla confusion as China extends electric vehicle subsidies to meet Covid-19 challenge

Subsidies and tax exemptions for “new energy vehicles” in China will be extended two years, one of a number of measures being implemented to “expand domestic demand, assist businesses reopening, sustain employment, and help all types of businesses to weather this difficult time,” the Chinese state council announced on Wednesday.

Despite the extension, possible changes to limit incentives to locally made vehicles means that Tesla and other non-domestic car makers in China may be left out in the cold.

China is the largest market for electric cars globally, and it has seen a downturn in sales since mid-2020 when incentives were slashed.

While that still resulted to an increase in overall auto market share from 4.2% in 2018 to 5.5% in 2019 with 1.18 million units sold, the emergence of the novel Coronavirus in late 2019 has now decimated the local market with electric car makers such as BYD reporting a 75% drop in sales in January 2020 compared to 2019.

Electric car incentives that were due to expire will now be extended until 2023, says China.

However, there is much that is not clear about the extended rebates, according to sources that spoke to Bloomberg.

People familiar with the matter say that various government departments are considering further reducing the incentives, which currently apply to electric vehicles with more than 250km driving range and give drivers a maximum 25,000 yuan (about $A5,800) subsidy towards the purchase of an eligible vehicle.

If successful, the discussions will result in a further 10% decrease of the incentives later in 2020, Bloomberg’s sources say. There is also talk of narrowing the selection criteria for the incentives.

Such a reduction could possibly temper benefits for non-domestic automakers such as Tesla and Volkswagen AG, as China considers limits of subsidies to locally made vehicles that cost under 300,000 yuan ($A69,600 converted).

The driving range of eligible vehicles may also increase to 300km minimum driving range, say Bloomberg’s sources.

Tesla, which had previously seen a meteoric rise in stock values as 2020 got off to start, has along with Volkswagen AG and other car makers seen values plummet as the Covid-19 pandemic impacts the global market.

Part of Tesla’s early 2020 gains rode on the back of the opening of its Shanghai Gigafactory 3, at which it started pumping out “Made-in-China” Model 3s.

Although a closure of the factory was reversed with help from the Chinese government after the Coronavirus spread was arrested with drastic lockdown measures, confusion over the EV subsidy extension has resulted in a further drop in Tesla stock values, says Wall Street commentator Allen Root.

He has little doubt Tesla will weather the storm of Covid-19, quoting Credit Suisse analyst Dan Levy who told Barron’s on Monday that, “Tesla will burn roughly $300 million a week during the shutdown, they have ample liquidity to get through this period.”

Uncertainty about what changes may be made to the subsidies however has seen values fall again 3.7% after a short and mild rally, as Wall Street analysts lowered forecasts.

“News about subsidies has more sway over the stock than analysts’ estimates because they are a big deal for battery-powered cars. EVs, for the most part, are still more expensive than equivalent gasoline-powered vehicles. Government incentives—such as tax credits—close the gap, helping drivers make the switch,” wrote Root for Barron’s on Wednesday.

Tesla is due to report on its first quarter deliveries for 2020 in coming days, and Root says that in the current economic climate expectations are low.

“Before the Covid-19 outbreak derailed the global economy, analysts expected Tesla to sell more than 90,000 vehicles. The Wall Street consensus is now closer to 80,000 vehicles,” he wrote.