China Tightens NEV Tax Exemption Rules

Two fiscal and tax policies related to new energy vehicles entered their implementation or phase-out phase-out periods in July this year, and are now impacting the tire and OEM industry.

Starting in July, the threshold for new energy vehicle purchase tax exemption was officially adjusted. According to new regulations jointly issued by the Ministry of Finance, the State Taxation Administration, and the Ministry of Industry and Information Technology, pure electric passenger vehicles with a range of less than 200 kilometers and plug-in hybrid (including range-extended) passenger vehicles with a pure electric range of less than 50 kilometers are no longer eligible for vehicle purchase tax exemption.

At the same time, new technical assessment indicators such as battery energy density and energy consumption per 100 kilometers have been added. 

This means that for some micro-low-speed electric vehicles and entry-level models with low range that previously relied on tax exemptions for sales volume, the final purchase cost has risen rigidly, and market demand has contracted significantly. These models are generally equipped with 15-inch and smaller economical semi-steel radial tires. This tire category has low technological barriers, thin profit margins, and severe homogenization.

Affected by this, small and medium-sized tire companies that have long relied on small-size tire orders are facing pressure from declining OEM demand, and some inefficient production capacity will be phased out at an accelerated pace.

Leading tire manufacturers, having accumulated experience in supplying 16-inch and larger tires with low rolling resistance and quiet operation for mid-to-high-end vehicles, have relatively stronger order stability, and their market share may further concentrate. Tire companies are also forced to increase R&D investment, adjusting their product structure towards lightweight, high-load-bearing, and low-energy-consumption tires specifically for new energy vehicles.

The reaction at the vehicle manufacturing level is equally direct. With the increased threshold for purchase tax incentives, some small and medium-sized automakers relying on micro-cars and short-range plug-in hybrid models are facing sales pressure. Product iteration and technological shortcomings are amplified, and models lacking R&D support will be phased out more quickly. Mainstream automakers are proactively reducing production of low-end, inefficient models, shifting resources to long-range, high-efficiency models that meet the new tax exemption standards. Competition among companies is shifting from price wars to a competition of technology and energy efficiency.

Another upcoming change is the reduction of vehicle and vessel tax incentives. According to policy arrangements, from January 1, 2027, pure electric commercial vehicles, plug-in hybrid commercial vehicles, and fuel cell commercial vehicles will no longer be exempt from vehicle and vessel tax, and the policy of halving the vehicle and vessel tax for energy-saving vehicles will also be cancelled. This signifies the official end of the vehicle and vessel tax incentives for new energy commercial vehicles, which had lasted for over a decade.

For the tire industry, this policy will indirectly impact the incremental demand for commercial vehicle tires. Commercial vehicles primarily use all-steel radial tires, which are thick, have high load-bearing capacity, strong wear resistance, long replacement cycles, and a large demand. With the elimination of vehicle and vessel tax incentives, the daily operating costs of new energy and hybrid commercial vehicles will increase, leading to more cautious purchasing and replacement decisions in logistics, engineering, and other commercial operations.

New vehicle sales growth may slow, limiting the increase in orders for original equipment all-steel tires, which will then be transmitted to the replacement market in the following year or two, suppressing the overall growth rate of commercial vehicle tire demand. Companies primarily focused on commercial vehicle tires need to reassess their production capacity planning to avoid structural overcapacity.

For commercial vehicle manufacturers, the operating cost advantage previously gained through vehicle and vessel tax incentives has essentially disappeared, narrowing the gap in the total lifecycle costs between new energy commercial vehicles and high-efficiency fuel-powered commercial vehicles.

Automakers can no longer rely on tax incentives to drive sales, they must compete by reducing overall vehicle energy consumption, increasing range, optimizing the three-electric system (battery, motor, and electronic control system), and controlling manufacturing costs. This change accelerates the shift from policy-driven to market-driven development of new energy commercial vehicles, and the expansion pace of low-tech hybrid commercial vehicles will also be adjusted.

These two policies are not simply signals of contraction, but rather rigid screening tools for industry upgrading. In the short term, they will squeeze out inefficient capacity in the automotive and tire industry chain, bringing certain market adjustment pressures, in the medium to long term, they will drive companies to shift from low-price, homogeneous competition to structural upgrades centered on energy efficiency, technology, and product quality. For OEMs and tire companies, proactively adapting to policies, accelerating product iteration, and optimizing capacity layout are common challenges they need to face in the next stage.