An inconvenient truth about China’s green car industry.

What country produced the most plug-in hybrids and other environmentally friendly vehicles in 2015? China. Churning out 2.5 times as many such vehicles as the No. 2 producer, the U.S., China became the land of green cars, also beating out the technologically advanced auto nations Germany and Japan.

The feat filled Chinese government officials with pride.

But a closer look reveals a different story. China came out on top thanks largely to a government subsidy for eco-friendly vehicles. Automakers rushed to produce these cars with no prospect of actually selling them; they merely sought government largess. Many across the country racked up “sales” by shifting inventories to familiar dealerships and group companies. Manufacturers learned that the more eco-friendly vehicles they produce, the more money they can collect in subsidies.

Production has surged since last spring to an unprecedented scale, and “sales” of eco-friendly vehicles skyrocketed, quite suspiciously, from a mere 8,000 units in 2011 to 330,000 units in 2015, despite an economic slowdown.

Automakers receive up to over $10,000 from the government for every eco-friendly vehicle they sell. The impact of the subsidy is so large that it can make up more than half of the net profit at some listed companies.

Since the inventory shifting became rampant, the government this year started to crack down on rogue companies. But state officials appear far from being serious: the government has already decided to keep the subsidy program in place until 2020.

The aim of the program is, ostensibly, to promote the use of green vehicles across the country to protect the environment. In reality, it is a way to fund domestic, uncompetitive companies struggling amid the country’s economic slowdown.

A similar measure was introduced in October. The government cut taxes on small vehicles with engines of 1.6 liters or smaller. What on the surface is a consumption-boosting tax cut is, to a large extent, a funding mechanism for struggling companies.

Numerous Chinese companies are now living off subsidies from these two programs.

This is not a way to increase global competitiveness. The Chinese auto market is a sham, buoyed only by fudged numbers thanks to state support. When the government’s anesthetic wears off, these borderline zombie automakers may have to pay a heavy price.

Via Nikkei

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