China’s $18-billion electric vehicle market’s uncertain future: EVs just 4% of total sales

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

By: | Published: April 16, 2019 11:50 AM

chinese electric vehicle market

China's automoblie industry has grown tremendously over the past decade and with the global focus shifting to electric mobility, an array of electric vehicle startups have been registered. China is big and has a big demand for passenger vehicles, but not as big as the combined production capacity of the nearly 500 EV manufacturers in China today, especially since only 4% of sales come from EVs. Spurred on by the seismic shift towards EVs, billions of dollars have been pushed into investment by car manufacturers, startups, Internet & electronic companies, and real-estate industries.

According to a Bloomberg report, 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’s 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 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 startups.’’

At least two dozen of those electric-car brands will be showcasing models at the Shanghai auto show starting this week. They range in expertise from nascent supercar maker Qiantu Motor to U.S.-traded startup NIO Inc. and elder statesman BYD Co.

Dozens of startups have entered the global EV business in recent years, raising $18 billion since 2011, according to BloombergNEF. Most of the biggest fundraisers are Chinese, including NIO, WM Motor, Xpeng Motors and Youxia Motors.

The startups promise to deliver a collective manufacturing capacity of 3.9 million vehicles a year. That’s excluding what some of the world’s biggest automakers are planning. China’s big, but it’s not that big. Annual sales of passenger EVs only surpassed 1 million units for the first time last year, according to BNEF, spurred by the subsidies that could slice thousands of dollars off the sticker price.

Yet EV sales make up just 4 percent 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 U.S. 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 Cui Dongshu, secretary-general of the China Passenger Car Association, an industry group. “Yet that market is for the competitive players, not the weakest ones, and the latter will be squeezed out.’’

The government started pushing the 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 7 million units. That’s the equivalent of about 20 percent of China’s total auto 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. Some subsidies that could total $7,500 per vehicle were halved.

“With the subsidy adjustments, some less technologically advanced EV startups will disappear,’’ said Zhou Lei, a Tokyo-based partner for Deloitte Tohmatsu Consulting. “There will be a reshuffle.’’ Then there’s the swarm of global giants from Tesla Inc. to Volkswagen AG to Ford Motor Co., all planning to flood the market with locally produced EVs.

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Elon Musk’s company started selling its first mass-market model in China this year and plans to begin building vehicles in Shanghai by year’s end. Tesla sold 14,467 vehicles in China last year, according to the Ministry of Industry and Information Technology.

Toyota Motor Corp., Fiat Chrysler Automobiles NV, Honda Motor Co., and Mitsubishi Motors Corp. chose a quicker way in: they all plan to sell what’s 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 lineup 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, according to data compiled by Bloomberg.

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

The ones facing the biggest risk are the 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, Roland Berger’s Fang said.

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