China Paces up to Build its Tesla Amidst Weak Economy and Dried Up Subsidies

When an idea synchronizes with national ambition in China, the result can be millions of dollars flushed and a handful of start-ups suffocating to survive in a chilled economy.

The past few years have resulted in venture capitalists rushing to pour billions of dollars into the flourishing electric vehicle industry, which is backed by the Chinese government.

Here are some recent headlines to observe how the investments have paid off.

  1. Shares of Tesla’s closest competitor, Nio are down by more than 50% this year to about $2.70 each.
  2. In November, Alibaba-backed XPeng tapped its own Chairman and CEO He Xiaopeng for a $400 million investment round, in which the electronics company Xiaomi participated as a strategic investor.
  3. Shenzhen-based BYD, which counts Warren Buffett as an investor, said in late October that net profits, ex-items, fell 130.1% in the third quarter. The Hong Kong-listed shares are down 25% for the year so far.

Over the last decade, these are some of the handful of survivors from Beijing’s efforts in the creation of China’s own electric car.

Presently, Chinese auto sales are really slow, while consumer subsidies for new energy vehicles are fading out and economic growth is slowing.

Start-ups didn’t expect the subsidies to last this long, said Rupert Mitchell, Chief Strategy Officer at Chinese electric car company WM Motor, which was founded in 2015 by a former Volvo and Geely executive.

According to CNBC, Mitchell said, “What was not in the business plans was that China would have its first fully blown automotive downturn in Chinese history.”

How it All Begun

Wan Gang, a former engineer for Audi in Germany, returned to China in the early 2000s. Within 10 years after his return, he became China’s Minister of Science and Technology, despite not being a member of the Chinese Communist Party.

Wan persuaded the central government to launch a national strategy for developing new energy vehicles and battery technology. Beijing was motivated to jump at an opportunity to become a global leader in an emerging technology, which promised to combat the pollution problem.

According to the Ministry of Finance of China, the central government has spent at least 33.4 billion yuan in subsidies between 2009 and 2015.

At the peak of the subsidy-driven boom, the number of new energy vehicles sold in 2014 increased more than four times from the year before. In 2015 it multiplied by more than four times to the number in 2014 to reach 330,000 vehicles, according to data from China Automotive Industry Association accessed through Wind Information.

In 2016, the Ministry of Finance said it found at least five companies conned the system of over 1 billion yuan. That year, new energy vehicle sales grew just 53%, data showed.

 Ray of Hope

Some young companies that benefited from China’s electric vehicle boom; however, are still confident about their growth.

XPeng expects to put about 150,000 vehicles on the road in about two years, said Brian Gu, President and Vice Chairman of XPeng, in an interview in late November. That’s nearly 10 times the sales of the company in last December for its first commercially available vehicle.

WM Motor’s Mitchell expects the company to break-even in the next 12 months, as the start-up puts greater effort into consumer marketing. The company is about to raise $1 billion, which he said would “fully finance” the automaker until a public offering.

“Looking at the last 10 years of Chinese government subsidies, we think their effect is more positive than negative,” said He Hui, senior researcher on China’s new energy policy at The International Council on Clean Transportation.

“We can’t say our new energy vehicles are number one”, she said. “But our batteries are.”

 

 

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