GUANGZHOU -- China's electric vehicle makers are struggling to break their dependence on dwindling government sales incentives, with leader BYD announcing a hefty decline in net profit for 2018 on March 27 as the automaker spent heavily to keep prices attractive.
Beijing's phaseout of subsidies for new-energy vehicles has put pressure on earnings, BYD said. Net profit fell 31.6% to 2.78 billion yuan ($414 million), even as revenue surged 22.8% to over 130 billion yuan and electric-car unit sales roughly doubled to nearly 248,000. BYD's operating profit margin shrank to 3.3% last year from a peak of 5.8% in 2016 as the company shelled out to maintain its low prices.
China began paring its subsidies in 2017, after launching the incentives in 2010 to cultivate the nation's electric-vehicle industry. Companies facing a decline in orders have struggled to cover the gap. The resulting hit to earnings has pressed many to rethink their strategies, and the country's roughly 60 makers of electric cars appear bound for a culling as this support ends in 2020.
"The electric bus sector is taking a particularly harsh fall," said a Chinese auto industry source. Bus companies, enticed by incentives worth about $30,000 per bus, snapped up the electric vehicles, but the withdrawal of these subsidies has left makers dry of orders.
One major player, Zhongtong Bus Holding, likely faced a roughly 40% drop in sales to about 13,000 units for 2018, with net profit seen falling at least 80% to about 30 million yuan.
Meanwhile, BYD rival Beijing Automotive Group's self-branded passenger vehicle segment, which includes electrics, faced a loss of over 1.5 billion yuan in the first six months of 2018 -- 300 million yuan steeper than the loss from a year earlier.
China's subsidies, which varied based on how many units automakers sold, let companies offer lower prices to capture demand. In 2015, Beijing required the automakers to use Chinese-made batteries, in effect favoring domestic players.
The country has become the world's biggest market for electrics on top of its leadership in their gasoline-powered cousins. China's sales of new-energy vehicles in 2018 surged 62% to 1.26 million, with most coming from domestic automakers. Five Chinese automakers, led by BYD, controlled a majority of the green passenger car market by share, said the China Passenger Car Association, an industry group.
But some fraud cases arose surrounding the subsidies in 2016 and 2017, and Beijing began closing the spigot in 2017.
Models from one of BYD's mainstay vehicle lines, capable of running at least 250 km on a single charge, are now eligible for 18,000 yuan in subsidies -- down from 34,000 yuan just a year earlier and a maximum of 60,000 yuan at first.
Whether BYD can "elevate its products' quality and raise prices is the issue at hand," said Tang Jin, a researcher with Japan-based Mizuho Bank who is familiar with the Chinese auto market.
In 2011, BYD became the first Chinese automaker to sell mass-market electric vehicles for individuals. The company has since expanded its lineup and increased sales, aided partly by subsidies. New-energy vehicles accounted for nearly half its roughly 500,000 unit sales last year, up from just over 10% of around 450,000 units sold in 2015.
But with those subsidies ebbing, profits began to decline in 2017 -- even as sales continued rising in defiance of an economic slowdown.
"Gross profits have fallen for many" automakers, said a representative at one midsize brokerage, due chiefly to their efforts toward covering the gap created by shrinking incentives.
The trend has spurred many automakers to revise their plans. BYD in March halted work through May at a Guangzhou electric bus factory. It claimed the facility had entered the off-season, though it is suspected the closure stems from a decline in bus orders.
Faced with an urgent need to produce cars that can sell even without the subsidies, BYD said on March 21 it will debut a miniature electric car in April geared toward young people, focusing on exterior designs. The company also announced a strategic tie-up with Huawei Technologies on March 25, aiming to apply the telecom giant's technologies in fields like 5G mobile networks toward automobile development.
NIO, an electric-car startup founded in 2014 that listed on the New York Stock Exchange in September, said on March 6 it was canceling plans for a Shanghai manufacturing plant. Singulato, a peer founded the same year, was reported in December to be three months behind on paying employee salaries.
The fallout has reached suppliers and other related businesses. Shenzhen-based electric-vehicle battery maker OptimumNano Energy froze production last July due to a sharp drop in orders.
Though it is ending green-car subsidies, the Chinese government this year began requiring both domestic and overseas-based automakers to produce a number of new-energy vehicles equivalent to 10% of their total production and import volume. Those unable to meet the quota are required to buy credits from those that succeed. This shift generally should result in Chinese players selling the credits to foreign rivals, an arrangement that some calculate will net BYD over 14 billion yuan in profit from 2019 through 2021.
Domestic automakers still hold the lead, but overseas players are preparing an offensive as Beijing's support nears its end. In April 2018, China said it would roll back restrictions on investment by foreign automakers into domestic new-energy car ventures. The next month, U.S. electric vehicle maker Tesla moved ahead with plans for a wholly owned Shanghai electric vehicle factory under a local branch.
Volkswagen also is working on a Shanghai plant, and Japanese automakers are gearing up to invest more in new-energy autos. The international push looks set to intensify the competition for Chinese electric vehicle makers.