Glenn Profile picture
Jun 22, 2024 17 tweets 6 min read Read on X
The EV sector industrial subsidy figures released last week by @CSIS are inflated by at least ~$80B, mainly from poor assumptions made to calculate the NEV Sales Tax Exemption that (i) don't pass the sanity check and (ii) are out-of-whack with disclosed actuals amounts.

🧵 https://www.csis.org/blogs/trustee-china-hand/chinese-ev-dilemma-subsidized-yet-striking
As disclosed in the CSIS analysis, the Sales Tax Exemption assumption is based on a very simple premise:

To incent purchases of NEVs (new energy vehicles i.e. BEVs+PHEVs) over ICE vehicles, most NEVs are exempt from the sales tax exemption, which is assumed to be 10%. Image
$39.5B of Sales Tax Exemption in '23 thus implies that there were at least $395B worth of NEVs sold in China based on CSIS assumptions.

Since we know how many NEVs were sold (~7.9M passenger and ~0.3M commercial), we can back out the implied average selling price (ASP).Image
CSIS discloses ASP assumption of ¥1.2M for large commercial vehicles. This would imply ~$54B in commercial vehicle NEV sales in '23, leaving $341B for light passenger vehicles.

Based on ~7.9M passenger NEVs sold in '23, this implies an ASP of $43k (¥310k). Image
This does not pass the sanity check, nor is it consistent with CSIS' own assumptions (passenger NEV ASP is ¥250k).

e.g. the best-selling models in China are compact and mid-size NEVs with ASPs in the ¥120-250k range.
In any case, we can also cross-check this assumption with actual disclosed figures.

The Ministry of Finance disclosed last year cumulative NEV Sales Tax Exemptions through 2022 of ~¥200 billion (~$29B) + another ~¥115 billion (~$16B) in 2023.

This suggests the CSIS estimate for Salex Tax Exemptions is overstated by 2.5-2.6xhttps://www.gov.cn/zhengce/202306/content_6888094.htm
Factoring in more accurate assumptions that are more in line with these actuals, I have done my own analysis on Chinese EV sector assumptions and arrived at ~$147B, ~$83B lower than the CSIS estimate. Note: the difference in Sales Tax Assumption estimate accounts for ~$64B of the difference. The remaining difference comes from the Buyer's Rebate which is also overestimated, although much more in the ballpark. I have copied assumptions for infrastructure subsidies, R&D and government procurement.
Based on this, more interesting is what happens going forward IMO.

Per below, the NEV Sales Tax Exemption has been extended for 4 more years, but like the Buyer's Rebate before gradually eases out.

For example, the maximum exemption halves in 2026 to ¥15k per NEV.
https://www.gov.cn/zhengce/202306/content_6888094.htm
https://www.adamasintel.com/china-ev-buyers-get-four-more-years-tax-breaks-as-us-incentives-fall-flat/
I've taken the EV sector subsidies analysis out through 2030 assuming the Sales Tax Exemption is retired after this current program ends.

As you can see avg. subsidies per vehicle continue to fall gradually, from $2,700 in '23 to <$200 by '30. Image
If we take the model even further out to 2040, China will have spent ~$330B in total subsidies on the EV sector.

Paired against ~704M cumulative NEV sales through 2040, this would average out cumulatively to a subsidy of ~$468 per vehicle.
I think the lesson here is pretty clear and does not need overstated subsidy estimates to make the point.

The key to any successful industrial policy subsidy program is providing support to a domestic industry to achieve scale and profitability so subsidies can be gradually withdrawn over time.

The last point is key. If industrial policy and subsidies cannot achieve industry scale and self-sustaining profitability, you end up with a non-competitive sector that continues to suck up fiscal resources indefinitely.
The development of the Chinese EV sector has followed this principle.

Subsidies per car have fallen from >$20k per vehicle to ~$2k per vehicle over the last decade and will be effectively completed by 2027. Image
The question for Western policymakers is not about the need to develop and retain an EV industry using industrial policy and subsidies, like China has done. That should be pretty clear, the answer is yes.

It is about execution of said industrial policy. Specifically, are we seeing aggregate subsidies per NEV go down over time at a satisfactory pace?
Remember there are other new industries beyond EVs.

That China is a few years away from withdrawing subsidies from EVs just means that those fiscal resources will soon be available to support development of other future industries.

If one is stuck subsidizing old industries indefinitely this just means less fiscal resources available to spur development of new ones.
This is not the first time I’ve seen highly questionable assumptions in CSIS analysis on China.

Its analysis of COMAC development costs was even more egregious and off by 6-14x.

These numbers influence policy and decision-making. Isn’t it important that we get them right?
Bad analysis does enormous disservice to our policymaking.

13 years ago, Chinese NEV industry subsidies were scoffed at as “wasted investment”.

Instead of breeding complacency, maybe we should have taken them seriously. Catching up will be that much harder as a result.
Another interesting datapoint from this analysis:

~2/3rds of NEV sector subsidies were focused aimed at stimulating the consumer demand side with <1/3rd focused on production.

Nascent industries require coordinated stimulation of both supply and demand.

This also contradicts prevailing narratives about how China "focuses disproportionately on the supply-side at the expense of households/consumers".Image

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More from @GlennLuk

Apr 1
What has struck me about today’s youth is the change in aspirational ceiling.

20-30 years ago Chinese youth dreamed of one day maybe reaching “First World” level quality of life.

Today, its youth aspire to something beyond. You are starting to see this in the next generation of entrepreneurs, the problems they are trying to solve and the way they talk about the future.
Contrast this with the last generation of entrepreneurs, like Ren Zhengfei.

He has always looked up to the West for inspiration: you can even see this in the architectural design of the Huawei Dongguan campus which was inspired by European architecture.

euronews.com/culture/2024/0…
Looking back at my own writings and essays, I have skewed on the optimistic side when it came to what China’s developmental ceiling was.

A decade ago, I pegged China’s LT developmental ceiling (some per capita based metric) around 50-75% of “frontier” development.
Read 7 tweets
Mar 23
Vietnam is now running an electronics net export balance of >$100B per year.

China’s comparable figure is ~$650B.

That means on a per capita basis Vietnam is now exporting electronics at over double the intensity as China.
When people who ask “who is the next China?” The context is usually figuring out where *labor-intensive manufacturing is going.

The answer was “inland China” for a few years after the GFC but today the answer is a medley of countries that are replacing China in the aggregate.
Vietnam is picking up not only consumer electronics but also toys and footwear.

Bangladesh is increasing export share in clothing / apparel.

Etc.
Read 19 tweets
Mar 21
A key difference between China and India as a destination for manufacturing FDI is that China made it attractive place for foreign MNCs to make tons of money.

India has not: returns on FDI generally for foreign MNCs has been mixed at best in India.
Companies like Apple, VW, BMW, Nike, Tesla, GM, Samsung etc. have made *trillions in FDI income in China cumulatively over the years, mainly selling to Chinese households.

HK and Taiwan-funded exporters have also made *trillions through the years by setting up export processing factories in China.
As we can see from balance of payments accounting, foreign MNCs earn FDI income outflows of close to $400 billion a year, or over $1 billion per day.

Foreign MNCs make a TON of money in China, contrary to what many claim.
Read 31 tweets
Mar 17
Embedded in this post is an implicit assumption that there is a single engineering development path to achieve an end goal, and/or that the end goal is to specifically replicate what ASML has achieved.
The underlying engineering objective here is NOT to recreate EUV “the way ASML did it” (although that is certainly one approach).

It is to print increasingly finer patterns on a semiconductor substrate in a process optimized for key vectors like cost, scalability, defect rates.
Indeed, while necessarily only speculative given the highly secretive nature of the project, I suspect China’s chip ecosystem — with Huawei at the center playing a pivotal coordinating role — features multiple teams/groups/alliances independently pursuing parallel approaches towards that underlying objective.
Read 7 tweets
Mar 11
China is flipping traditional macroeconomics on its head because its policy focuses more on elasticity of supply than elasticity of demand.

e.g. macro folks equate low inflation / deflation to lack of demand growth, whereas in China it is really more driven by supply factors.
Where economists have a tendency to focus more on how price signals (driven by demand) ➡️ changes in supply, much of China's rapid catch-up development has been from making sure supply/capacity runs ahead of demand (i.e. does not become a developmental bottleneck). Image
There is very much an axiomatic "if you build it, they will come" ideology to Chinese macroeconomic planning based on the idea that ...

... "making more stuff" drives societal spillovers that make it possible to produce more efficiently over time.

Read 13 tweets
Mar 6
As I wrote here about the palpable shift to a "looser" fiscal environment, China is making a pivot into a "kinder, gentler" phase, at least economically speaking.

But there are other key signals as well, such as calls by Beijing to address excessive neijuan 内卷 ("involution").
Li Qiang recently discussed the importance of addressing "excessive, self-defeating competition" at the Two Sessions.

This is significant because it is the first time it has been officially discussed at such a high level.

business-standard.com/world-news/exp…
While neijuan is often associated with manufacturing overcapacity, these are actually two separate concepts.

Neijuan is centered around the concept of competition, not capacity.

It's only to the extent capacity is a critical success factor in the specific sector's competitive dynamics that neijuan can lead to a "race to the bottom" in building out capacity.
Read 23 tweets

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