What happened

Shares of Kandi Technologies (KNDI -4.19%), primarily a developer, manufacturer, and retailer of electric vehicles (EV) and EV products in China, were down nearly 16% Tuesday morning after the Chinese government lowered EV subsidies.

So what

China officially dialed down its highest subsidy: Pure battery EVs with a driving range of 250 miles and higher will be cut in half to $3,700 per vehicle, according to the Ministry of Finance.

Kandi's EX3 electric vehicle parked.

Kandi Technologies' EX3 electric vehicle. Image source: Kandi Technologies.

The finance ministry wasn't done there, and encouraged local governments in China to cut subsidies on EVs after a three-month grace period. When you combine the two subsidy cuts, the total impact would be a 67% reduction in EV subsidies, which was a bigger hit than analysts' expectations of a roughly 40% to 50% reduction. The news sent Kandi's stock lower, partially offsetting gains from earlier this year

Check out the latest earnings call transcript for Kandi Technologies.

KNDI Chart

KNDI data by YCharts

Now what

This will obviously have a short-term negative impact on demand for EV manufacturers such as Kandi because electric vehicles become slightly less affordable overnight. While we didn't have specific details or figures, this was an expected development as the government aims to completely remove subsidies after 2020. The reason for the scaled-back subsidies is simple; China wants the industry to develop through innovation rather than government assistance, especially as the cost to develop EVs declines. This will be a speed bump for automakers that don't reduce the vehicle price to offset the subsidies -- such as electric-vehicle maker NIO Inc., which doesn't plan on adjusting prices -- causing the vehicles to become more expensive to consumers, but in the long run it's the right move.