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No future for conventional internal combustion engine vehicles in China

No future for conventional internal combustion engine vehicles in China

The production and sale of electric vehicles (EVs) have exploded in China in recent years and the East Asian country now accounts for more than half of all new electric cars sold worldwide. New energy vehicles (NEVs) offer China several environmental benefits including a reduction in air pollution and lower greenhouse gas emissions. Diversified powertrains and fuels also enable China to improve energy security through a reduction in its reliance on foreign oil.

China is the number one consumer of crude oil in 2022 at 713 million tonnes, around 80% of which has been used in the transportation sector. At the turn of the century, China’s crude oil import dependency was only 27.9%. Today, 71.2% of crude oil is imported. 

No future for conventional internal combustion engine vehicles in China

The rapid adoption of NEVs in China began in 2015 following the introduction of financial subsidies nationwide. During F+L Week 2023, the premier annual event for the fuels and lubricants industries in Asia, Dr. Qingyuan Song, chief engineer of policy & regulatory affairs at Geely Powertrain, provided details on the development of China’s NEV market and the driving forces behind China’s NEV policy.

Song is responsible for the technology roadmap and product planning at Geely Powertrain and has been tasked with ensuring regulatory compliance for domestic and international markets. He is active in government think-tanks such as the China Automotive Technology and Research Center (CATARC), China Association of Automobile Manufacturers (CAAM) and China SAE, as they look to influence upcoming carbon and emissions regulations, including China VII.

During his presentation at F+L Week, from a particular OEM standpoint, Song discussed the impact of purchase subsidies, tax incentives and the stringent NEV-CAFC (New Energy Vehicle-Corporate Average Fuel Consumption) Dual Credit Policy in promoting NEV growth in China. Central and municipal government subsidies on the purchase of EVs and plug-in hybrid electric vehicles (PHEV) provided the initial driving force, he says. Purchase subsidies were progressively lowered in recent years before being completely withdrawn at the end of 2022.  

No future for conventional internal combustion engine vehicles in China

Tax incentives have also motivated the uptake of NEVs. The Vehicle Purchase Tax in China is 10%. However, NEVs are exempted from this levy. On June 21, China’s Ministry of Finance announced a further CNY520-billion (USD71.8 billion) package of tax breaks for NEVs over the next four years. NEV purchases will be fully exempted from the tax in 2024-2025, offering potential savings of up to CNY30,000 (USD4,144) per vehicle. In 2026-2027, the tax exemption will be halved and capped at CNY15,000 (USD2,072). This policy applies to battery electric vehicles (BEV), plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles.

Dr. Song shares his insight on how the Chinese auto industry, especially domestic brands including Geely, proactively responded to the changes in government policies and took advantage of the opportunities in the growth of NEVs.  The phase-down and subsequent removal of upfront purchase subsidies was expected to result in a sharp drop in NEV sales, says Song. However, sales actually increased as the NEV-CAFC Dual Credit Policy kicked in, he says.  The policy was implemented on April 1, 2018, establishing a points trading system that encouraged a market-oriented transformation of the market. Automakers are required to sell a certain portion of NEVs and achieve positive results for CAFC.  Since 2019, most domestic brands have been well prepared and ready for high volume production of NEVs, due to better understanding of government policies and shorter product development cycles. 

A huge supply of NEV credits, due to the exponential growth in NEV sales, is gradually diminishing the value of NEV credits, despite increasing difficulty in attaining NEV credits. Nonetheless, voluntary purchases of NEVs are increasing rapidly, says Song. NEVs have been widely accepted by the average Chinese consumer since 2020, he says. Even cities which do not offer favourable policies on NEV purchases and NEV road-rights have demonstrated strong buying interest over the past couple of years.  

As the voluntary purchase of NEVs gains steam, PHEVs and range extended electric vehicles (REEV) are emerging as the new stars and are a major driver of NEV growth, says Song. The Geely representative cited several advantages of PHEVs and REEVs over the internal combustion engine (ICE), including a favourable upfront purchase price, lower use costs and more advanced features. The cost advantage of PHEVs versus ICEs—and hybrid electric vehicles (HEV)—will continue to expand to 2030, says Song. 

Dr. Qingyuan Song
Dr. Qingyuan Song

Of course, PHEVs and REEVs are not subject to the range anxiety experienced in BEVs. Nevertheless, BEVs seem to be the long-term winner, says Song. These powertrains offer a cleaner, quieter, faster way to travel. Eventually, they will also be cheaper as more rigorous carbon dioxide (CO2) and fuel economy standards come into effect and as raw materials become less expensive. 

As a rule of thumb, more stringent emissions standards increase the cost of conventional vehicles. Throughout the globe, countries are pushing for a zero CO2 emission fleet. For instance, the European Union’s “Fit-for-55” regulation mandates zero tailpipe carbon emissions by 2035 for both new cars and vans. China VII emissions regulations are anticipated to come into effect in 2027.

China has pledged to become carbon neutral by 2060. To fulfil this ambitious target, EVs need to account for more than 50% of sales in 2030, 70% in 2035—with no new traditional ICE vehicle sales, and 100% of sales in 2045. 

Conventional ICE vehicles have no chance of survival in China, says Song. The powertrain will lose its cost advantage over BEVs after 2025, he says. The cost of battery material continues to fall, whereas pollution and more stringent global emissions regulations mean higher costs for ICE vehicles. In 2030, the expected lower battery price and low usage cost will also make BEVs cost competitive with PHEVs. From an OEM standpoint, technology innovations to achieve price and value advantages are key to meeting the demands of both consumers and governments, says Song.