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Subsidy Risk

Sigma Investment Counselors

April 3, 2019

Dependence on subsidies entails significant, and potentially existential, risk factors.  A case can be made in favor of subsidizing new technology, for limited periods, in order to mitigate early, low volume related costs, as potential participants seek to reach critical mass.  However, subsidies are generally of limited duration, as the long term costs are not supportable.

Investors should seek to understand the importance of subsidies when assessing a company’s potential.

For example, China has been a major proponent of electric vehicles (EVs) and, through generous subsidies, became the world’s largest manufacturer of EVs, accounting for more than 50% of global EV volume.  According to official figures, there are currently 487 EV makers operating in China.

China’s interest in EVs may be driven by factors that may not be applicable to most other countries.  See our blog dated 16 Jun 2017 titled “Coal Powered Cars”.

China has now determined that a change in policy is required.  Accordingly, China recently announced that subsidies would be slashed by more than 50%, starting in June, and eliminated completely by the start of 2021.  It is expected that the vast majority of China’s EV manufacturers will vanish along with the subsidies.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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