China's electric car bubble at risk as more firms hop on

All-electric battery cars in a carpark operated by General Motors and its local joint-venture partners in Liuzhou on Feb 28. China now has 486 electric vehicle manufacturers, more than triple the number from two years ago.
All-electric battery cars in a carpark operated by General Motors and its local joint-venture partners in Liuzhou on Feb 28. China now has 486 electric vehicle manufacturers, more than triple the number from two years ago.PHOTO: REUTERS

BEIJING • An iPhone assembler, e-commerce emporium and property developer typically do not compete in the same business - except when it is electric vehicles (EVs) in China.

That is because of a seismic shift towards EVs, which has spurred billions of dollars in investments by traditional carmakers, start-ups and titans of the Internet, electronics and real-estate industries.

The rush is on even as the government pulls back on the subsidies that juiced the industry. There are now 486 EV manufacturers registered in China, more than triple the number from two years ago.

While sales of passenger EVs are projected to reach a record 1.6 million units this year, that is likely not enough to keep all those assembly lines humming, prompting warnings that the ballooning EV market could burst and leave behind only a few survivors.

"We are going to see great waves sweeping away sand in the EV industry," said Mr Thomas Fang, a partner and strategy consultant at Roland Berger in Shanghai. "It is a critical moment that will decide life or death for EV start-ups."

At least two dozen of those will be showcasing models at the Shanghai auto show starting this week. They range in expertise from nascent supercar maker Qiantu Motor to US-traded start-up NIO and elder statesman BYD.

Dozens of start-ups have entered the global EV business in recent years, raising US$18 billion (S$24 billion) since 2011, according to BloombergNEF (BNEF). Most of the biggest fund-raisers are Chinese. The start-ups promise to deliver a collective manufacturing capacity of 3.9 million vehicles a year. That is excluding what some of the world's biggest carmakers are planning.

NO ROOM FOR BIT PLAYERS

There is still huge room out there in the new-energy vehicle market with China's relatively low vehicle-penetration rate. Yet that market is for the competitive players, not the weakest ones, and the latter will be squeezed out.

MR CUI DONGSHU, secretary-general of the China Passenger Car Association, on the sale of electric vehicles in China.

RISING ABOVE THE COMPETITION

Only companies that have solid technology reserves can stand out amid competition. By owning core technologies, we can see further and deeper.

MR WANG CHUANFU, BYD founder and chairman, on being an established player in the electric vehicle industry.

China's big, but it is not that big. Annual sales of passenger EVs only surpassed one million units for the first time last year, according to BNEF. Yet EV sales make up just 4 per cent of overall passenger vehicle sales of 23.7 million units, according to the China Association of Automobile Manufacturers.

At the same time, sales of traditional cars are currently in a free fall, plunging for the 10th straight month in March as a slowing economy and trade tensions with the US weigh on consumer sentiment.

"There is still huge room out there in the new-energy vehicle market with China's relatively low vehicle-penetration rate," said Mr Cui Dongshu, secretary-general of the China Passenger Car Association. "Yet that market is for the competitive players, not the weakest ones, and the latter will be squeezed out."

The government started pushing development of electric cars to help eliminate air pollution, reduce oil imports and develop high-technology manufacturing.

By 2025, China's leaders want annual sales of new-energy vehicles - including pure-battery electrics, plug-in hybrids and fuel-cell cars - to reach seven million units, about 20 per cent of China's total car market. Even that amount would barely be enough to sustain a few dozen companies - not hundreds. A factory typically needs to produce at least tens of thousands of vehicles a year to be profitable.

Another headwind is the subsidy cut announced last month by the finance ministry, a move meant to encourage manufacturers to rely on innovation rather than assistance. Then there is the swarm of global giants from Tesla to Volkswagen to Ford, all planning to flood the market with locally produced EVs.

Mr Elon Musk's company started selling its first mass-market model in China this year and plans to begin building vehicles in Shanghai by the year's end. Tesla sold 14,467 vehicles in China last year.

Toyota, Fiat Chrysler, Honda, and Mitsubishi chose a quicker way in: They all plan to sell what is essentially the same car, developed by Guangzhou Automobile Group.

 
 
 

More established local manufacturers, such as BYD, likely can withstand the competition and the subsidy cuts, given a track record spanning years, a line-up including cars and buses, and an existing customer base.

The Warren Buffett-backed company has boosted revenue for six straight years and turned a profit since at least 2000.

"Only companies that have solid technology reserves can stand out amid competition," said Mr Wang Chuanfu, its founder and chairman. "By owning core technologies, we can see further and deeper."

The ones facing the biggest risk are upstarts still seeking their footing. Many are founded or funded by people with an Internet or technology background, used to hefty cash-burn rates but still not necessarily fully aware of the massive investment needed for car manufacturing, Mr Fang said.

The non-car companies spending heavily on EVs include Foxconn, Alibaba and China Evergrande. Start-ups need to secure their funding within the next year or risk being wiped out, said Mr Li Xiang, founder and chief executive officer of the Chehejia brand.

Chehejia - which recruited talent from Daimler, Toyota and BMW - plans to start deliveries in the fourth quarter, after initially aiming for 2017.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on April 16, 2019, with the headline 'China's electric car bubble at risk as more firms hop on'. Print Edition | Subscribe