Authorities in China and India have singled out vehicular emissions as a major cause of choking cities like Beijing, Shanghai and Delhi.

This dire situation, partly caused by conventional vehicles’ emissions as well as heavy smog, has prompted the Chinese government to issue a ‘Stage IV PV Fuel Consumption’ policy for 2016-2020. It stipulates a fuel consumption target of 5L/100km and CO2 of 120g/km by the end of 2020.

To meet this standard, car makers have been making efforts to launch new energy vehicles (NEVs). In the first half of this year, China’s NEVs, including both domestic and imported vehicles, did exceptionally well with sales surging by 180 per cent year-on-year (YoY) to around 170,000 units.

With the exception of hybrid cars, which are not classified as NEVs by the Chinese government, domestic NEVs showed a growth of 169 per cent YoY to 120,000 units. Behind this explosive growth are favorable policies, particularly for battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs). As the two largest contributors, the BEV and PHEV segments accounted for 70 per cent of the entire NEV market .

What’s more, some cities even offered free licence plates or special plate lottery-system for NEVs.

This incentive is attractive especially in bigger cities like Shanghai and Beijing where car license plate prices hit around RMB 85,000 with a winning rate of only three to five per cent but where the plate lottery winning rate is only 0.5 per cent. Thus, it is not surprising to see that at the end of 2015, Shanghai had the highest NEV share at 20 per cent, followed by Beijing, Shenzhen, Hangzhou and Guangzhou.

However, under this shiny NEV booming market driven by favourable policies, adverse side effects have emerged. The generous subsidies have led to serious market corruption , as a number of automakers focused their efforts on cheating the system rather than on technological improvements. As a result, many low-cost BEVs, with purchasing price of only RMB 30,000-50,000 after subsidy, found the opportunity to spring up. This in turn squeezed the market from the real BEVs, which are usually priced higher, such as the BYD E6 or the Denza Tiger.

In addition, local subsidies also created regional barriers for outsiders and destroyed fair competition. By the end of 2015, 61 per cent PHEVs were sold in Shanghai and among them, 64 per cent were from BYD while Shanghai automaker Roewe only accounted for 32 per cent.

In Shanghai’s 2016 subsidy policy, one issue jumped into the public eye: that besides the national and Shanghai subsidies, vehicles with engine displacement of less than 1.6L, gas tank of less than 40L and fuel consumption per 100km of less than 5.9L can receive an extra subsidy of RMB 14,000. No doubt, this policy aims to protect its own carmaker, Shanghai Roewe. Similarly, Beijing’s subsidy system includes only BEVs.

Given the constraints of more affordable battery technology and limitations on charging infrastructure, we do not envisage the real BEV era coming for at least ten years. Therefore, the BEV market will continue to be flooded with low-cost domestic models. Considering technology cost and customer acceptance, an increasing number of both global and JV companies are choosing PHEV . In addition, the voice of 48V technology has been raised making its market potential inestimable. To be sure, competition for a piece of the huge Chinese market is fierce. This is evident from the fact that from just two to three players in the past two years, nearly every OEM be it local brands or global giants are active in the market today. In contrast, the hybrid electric vehicle (HEV) market in India has been a slow starter. It was only last year when the Government launched the FAME India scheme as part of its National Electric Mobility Mission Plan. It aims to provide Rs 795 crore until 2020 to support the manufacture and sale of HEVs. The aim is to put six million HEVs, including two-wheelers, on the road by 2020.

To date, light vehicles that qualify for incentives under the FAME India scheme are Mahindra’s e-Verito and E2O as well as Maruti-Suzuki’s Ciaz Diesel SHVS and Ertiga LDI SHVS as well as Toyota’s Camry Hybrid. In 2015, the share of HEVs in India’s light vehicle market was one per cent on sales at nearly 17,000 units. LMC Automotive estimates this volume to rise to 271,000 units by 2023, achieving a share of six per cent. Maruti-Suzuki is predicted to be the highest seller of HEVs.

Scarlett Liu is China HEV Market Analyst and Ammar Master, Senior Manager, LMC Automotive