SHANGHAI—The world’s fastest-growing market for electric vehicles is slowing.
In China, sales of the vehicles declined 5% and 11% year over year in July and August respectively, raising concerns that even in tech-hungry China, EVs could be a hard sell for years to come.
“New-energy vehicles are not selling well,” said a BAIC Motor Corp. salesman surnamed Li recently at a dealership in the western city of Chongqing. “Consumers have concerns about the range, the convenience of charging and the value retention of EVs.”
China remains by far the biggest EV market—1.26 million were sold there last year, 60% of the global total—and most analysts still expect widespread adoption in the long term. But sales have sputtered during a brutal downturn in the broader automobile market.
Chinese vehicle sales fell for the first time in decades last year, declining 3%, before falling 11% in the first eight months of 2019. While EVs initially proved resilient, they, too, have now succumbed to the fragile consumer confidence sapping the Chinese economy.
An official target of two million EV sales in 2020 now looks challenging.
BYDCo.1211 0.64%, China’s largest seller of EVs, said its EV sales declined 23% in August, after sliding 12% the month before, and the country’s bevy of EV startups is under pressure as the uptick in sales needed to become profitable fails to materialize.
NIOInc.,NIO -5.53%one of the most prominent Chinese startups seeking to dethrone TeslaInc. as the leader in premium EVs, said Tuesday that it lost $453 million in the second quarter of 2019, bringing its losses over the past two years to $2.61 billion, according to the company’s filings.
The five-year-old company’s New York-listed shares have lost over 80% of their value since March as investors cool on the Chinese EV sector, which had once been a magnet for funding. The Tencent HoldingsLtd. -backed company delivered 6,692 vehicles in the first half of the year, after delivering 7,980 in the final quarter of 2018, underscoring its failure to build momentum.
In its second-quarter report, NIO said Tencent and William Li, NIO’s founder, would each provide $100 million to the company, though at its current rate of cash burn that money would only last about six weeks. Mr. Li blamed “tempered market conditions” for the company’s struggles.
Across China, dealerships desperate to shift inventory have been offering steep discounts on gasoline cars, stunting EV sales. But more critical, people in the industry say, has been the removal of two government props for the EV market.
The first, subsidies, helped keep the prices of otherwise expensive electric models artificially low. China spent $58 billion on direct and indirect subsidies through 2018, according to the Center for Strategic and International Studies, a U.S. think tank. In July the government drastically reduced subsidies, and next year it will discontinue them.
Second, the government’s resolve to promote EVs appears to have wavered in the face of the greater need to stoke economic growth. Earlier this year it told cities that had imposed limits on gasoline-car purchases to loosen their restrictions to help boost general auto sales. The near impossibility of buying a traditional car had been the clincher for thousands of people who bought EVs in Beijing, Shanghai and other Chinese megacities, but that motivating factor looks like it is being watered down.
In September, the southern city of Guiyang eliminated purchase restrictions. It had previously issued just 2,000 new license plates a month, a limit designed to combat pollution and congestion.
But while momentum may have been lost, Beijing isn’t giving up on EVs. Nor are local governments across China that are counting on EV makers to provide jobs and that have in many cases invested hundreds of millions of dollars in EV startups to support their production.
The government is still forcing all auto makers to start building EVs this year, guaranteeing mass production despite the unattractive economics. Meanwhile, Tesla says it will start producing Model 3 EVs at its new Shanghai plant by December, further cranking up the local EV supply.
Electric vehicles must account for roughly 3%-4% of an auto maker’s Chinese output in 2019, with the level set to rise gradually in subsequent years. Many auto makers including General MotorsCo.and Volkswagen AG have announced ambitious EV rollout plans despite the risk the vehicles will be unprofitable, at least at first.
Auto makers have accepted the prospect of having to build unprofitable EVs as a cost of doing business in China, said Jing Yang, an associate director at Fitch Ratings. “Their near-term focus is not on profitability, but rather on increasing production to fulfill the regulatory requirements,” she said.
For many EV makers, profits will be elusive for several years, especially with manufacturers reluctant to pass the cost of subsidy reductions on to consumers for fear of killing the market. Mr. Li, the BAIC dealer, said the company had increased the cost of its EU series EVs—China’s best-selling electric cars this year—by 3,000 yuan, or roughly $420.
But that increase doesn’t begin to fill the hole left by vanishing subsidies. In Shanghai, for example, the maximum subsidies for an EV in 2018 were 90,000 yuan, and this year they have dropped to 25,000 yuan. Next year they will fall to zero.