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China will scale back subsidies on electric vehicles as the industry develops and costs go down, trying to encourage local manufacturers to rely on innovation rather than government assistance to spur sales.

The subsidy for pure battery electric cars with a driving range of 400 kilometers (250 miles) and above will be cut by half, to 25,000 yuan ($3,700) per vehicle from 50,000 yuan, the Ministry of Finance said in a statement on its website Tuesday. To qualify for any subsidy, electric cars need to have a range of at least 250 kilometers, compared with 150 kilometers previously, the ministry said.

The government had warned of its plans to scale back subsidies and phase them out completely after 2020, though it hadn’t given details. While financial support for purchases has fueled the rapid growth of China’s electric-car industry, there are also concerns that automakers have become overly reliant on them at the expense of developing new technologies and better vehicles.

The move aims to support “high-quality development of a new-energy automobile industry,” the ministry said.

U.S.-listed advance depository receipts for NIO Inc., the maker of ES8 electric sport utility vehicles, plunged as much 5.4 percent to $5.06, the lowest intraday price since the Shanghai-based company’s initial public offering in September.

“While the incumbent OEMs will see some earnings damage, we consider NIO the most vulnerable of all,” Robin Zhu, a Bernstein analyst, wrote in a report Tuesday. “Despite struggling for demand, the company recently indicated it won’t reduce prices to offset lower EV subsidies. Today’s subsidy cuts mean NIO’s cars just got meaningfully more expensive for consumers.”

Worse Than Expected

The finance ministry also urged local governments in China to remove subsidies on purchases of electric vehicles, including buses and trucks, after a three-month grace period starting Tuesday.

When combining the halving of subsidies for EVs with at least 400 kilometers of range with the complete removal of direct incentives from local governments, the total reduction is 67 percent, a more drastic cut than the 40 percent or 50 percent that the market was expecting, according to Patrick Yuan, a Jefferies analyst.

Subsidies have been key to making plug-in hybrids and EVs of companies such as BYD Co., which is backed by Warren Buffett, more affordable to Chinese consumers and helping the country surpass the U.S. as the world’s biggest market for such vehicles in 2015. On top of what the central government spends, Chinese cities and provinces separately offer incentives to make electric cars more appealing in a country where automakers from Volkswagen AG to Ford Motor Co. are planning to increase EV offerings.

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