Auto Industry

Battery banditry

China cracks down on subsidy cheats in electric vehicle market

Electric Bus w

Bus makers hit by subsidy scandal

In the US, Judy Garland famously sang one of her most iconic songs atop an electric trolley bus. But while the bell was going “ding ding ding” in the fictional St Louis of 1903, such trolleys had already been silenced by the time the film was made in 1944.

Five years later, a group of five companies (Firestone Tire, Standard Oil, Philips Petroleum, General Motors and Mack Trucks) were convicted of conspiring to monopolise the US transport system after bribing or cajoling cities into ditching their electric transit systems for petrol-driven buses. Nobody went to jail – much to the disgust of antitrust prosecutor William Cornelius Dixon who towards the end of his life told an interviewer, “They were guilty, guilty as hell.”

In China, five companies have been similarly named and shamed this month after a nine-month investigation into subsidy fraud. As we reported in WiC316, domestic news outlets have been pursuing the subject since the middle of last year, when a group of academics penned an open letter to the government to investigate.

After an investigation covering 93 companies and 401,000 electric vehicles, fraudulent behaviour was discovered concerning the sales of 76,374 new energy vehicles, or almost one fifth of the total. The government says the fraud has cost the taxpayer Rmb9.27 billion ($1.39 billion) in wrongly-claimed subsidies, or close to a third of the Rmb33.4 billion it has dished out to help the electric car industry since 2009.

None of the Chinese automakers has the standing of a General Motors or a Firestone Tire. Two, however, are listed and their share prices are both down about 40% so far this year (Shenzhen Wuzhoulong whose listed parent is Sichuan Western Resources and King Long United Auto whose listed parent is Xiamen King Long Motor).

The worst offender was Suzhou GMC Bus, which collected Rmb261.6 million in subsidies for a fleet of electric buses that were never produced. It now has to pay the sum back on top of a 50% fine. It has also had its licence revoked.

The other offenders, which include Henan Shaolin Bus (not related to the famed Shaolin Temple) and Chery Guizhou Wanda Bus have been slapped with fines too.

As 21CN Business Herald reports, electric buses have been particularly popular for the fraudsters because they attract the highest subsidies (Rmb300,000 for a bus that’s less than eight metres long, or Rmb500,000 for one exceeding eight metres). Local government incentives – on top of this – can bring overall subsidies above Rmb1 million.

The magazine further notes how much wider the subsidy fraud is within the industry. Since the Ministry of Finance announced its preliminary findings at the beginning of September, local newspapers have claimed that most of the big domestic players are involved, plus a number of foreign ones.

Meanwhile, 21CN highlights related party transactions in which affiliates have been claiming illegal subsidies. It flags Geely Auto subsidiary, Shanghai Maple Auto, which claimed illegal subsidies covering 8,908 vehicles.

In July, the Hong Kong-listed company moved to address the issue by purchasing Shanghai Maple’s 50% stake in Kandi Electric Vehicle (NASDAQ-listed Kandi Technologies owns the other half) for Rmb730 million and its 45% stake in Ninghai Electric Vehicle for Rmb620 million.

So why has the government not taken stronger action to clean up the industry?

As analyst Zhou Jincheng tells Bloomberg: “Everyone knows it can’t just be five companies involved.” However, he adds “the government is concerned about casting the net too wide in case the repercussions strangle the industry.”

Experts have generally praised the government’s action as an industry wake-up call that will help force out weaker players. Officials at the Chinese Automobile Manufacturers Association (CAMM) say it will undoubtedly have an impact on 2016 sales figures, but will benefit the industry over the longer term.

In the year to August, a total of 245,000 electric vehicles were sold in China, up 115.6% year-on-year. The growth has been impressive but so far has fallen far short of CAMM’s 700,000 vehicle target for this year.

However, CAMM vice secretary general, Xu Yanhua, tells 21CN that fourth quarter sales can top the previous three quarters combined, and says the target remains achievable.

Whether the goal is met will perhaps also depend on the timing of an expected government announcement on a revised subsidy policy. Experts believe it will move away from subsidies targeting sales (easier to manipulate) towards incentives for R&D and breakthroughs on battery technologies (i.e. longer lifespans, enabling greater driving distances), which will help foster the global champions the government craves.

In the meantime, Beijing Daily highlights that while the government has done a good job of rolling out its national vehicle charging network (81,000 stations at the end of June, up 65% since the end of the 2015), there have been difficulties getting them fully operational.

Problems include charging stations that are not yet connected to the national grid, inadequate information about where they are located and most importantly of all, confusing payment mechanisms.

To resolve the payment challenges Electric Life founder Wei Shiqin tells Beijing Daily the industry needs some form of UnionPay for electric car owners (UnionPay is the industry standard for credit card and bank card payments).

At least the subsidy scam does not appear to have affected the share prices of industry leaders BYD and Geely (up 25% and 74% year-to-date). Social media also believes the trend towards electric cars is irreversible. “This doesn’t even count as a speed bump along the way,” one netizen concluded. Indeed, enthusiasm to fund the industry is growing – last week LeEco announced it had received $1 billion of new capital from the likes of Legend Holdings and China Minsheng Trust to finance production of its new Le Supercar electric vehicle.

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