Roughly ten years ago, when the electric vehicle (EV) industry started to gather its pace, a few could say that producer originated from an emerging country might be able to join the race. After a while, it was obvious that China takes it seriously, and the reality made a number of experts overhaul their original predictions. So-called "World's factory" had always had a pretty poor performance in the automobile industry, then global macro trends combined with several huge steps taken by the Chinese government made it possible for the country to jump into this prospective field.
Nowadays, when it comes to the battery electric vehicles (BEV), China is not only a taker possessing the world's largest middle-class, but a giver as well. EV sector is shaping the competitive landscape in the domestic auto market ubiquitously. It is no great surprise that the local players fight brutally: potential is, indeed, tremendous.
Bullish elephantine market
The statement "China's economy is growing rapidly" became a truism a long time ago. The same can be applied to the boosting middle class in the country. No doubt that demand exists and springs up like mushrooms. However, subdued by international competition, supply within some underdeveloped industries is on the embryonic stage. EV sector in China turned to be an exception: It has been growing from zero, and after less than a dozen years found itself at the peak of productivity, generating a handful of new prominent startups that force incumbents to roll up their sleeves too.
Over the six years of development, the Chinese new car makes have evidently increased their market share both in the national auto scene and among global competitors (in terms of a number of units produced). In 2017, almost half of all the battery electric vehicles produced worldwide were manufactured in China. 579,000 cars were sold in the country within the same year – the number grew 72.32% since 2016. Domestically, overall automobile sales just tumbled, facing the first negative market growth rate record in 28 years. So, this picture is even brighter: BEV sector's six-year market share growth CAGR amounted to 88.6%.
Positive tendencies definitely do exist here. However, the fastly developing sector highly depends on the support provided by the state. The second crutch of the far-from-profitability enterprises is VC. New Chinese EV manufacturers are like the ropewalkers remaining between risk-taking investors and stability-seeking government. The scene isn't too tranquil: the rope is held by these two groups while the blood-thirsty traditional car makers wait below.
Industry chronicles
Sowing (2001 – 2008)
The new energy vehicle research project was included in the national "863" major science and technology program in 2001. After six years of torpor and preparation, the Chinese government published the "new energy vehicle production access management rules", which came into effect on November 1, 2007. Within this document, 20 new national standards for pure electric vehicles were promulgated. In 2008, the global economic crisis barely hindered China's new energy vehicle market. Sales of passenger cars reached 899 units, while 1,536 commercial vehicles were sold in the same year.
Cultivation (2009 – 2011)
China's three ministries (Ministry of Science and Technology, Ministry of Finance, Ministry of Industry and Information Technology) jointly with the National Development and Reform Commission launched the "New energy vehicle demonstration and application project" in 2009. Due to the small number of enterprises involved, high cost and relatively immature technology, the results of the plan implementation didn't meet expectations.
China increased financial support for new energy vehicles from 2010. In July, 25 cities across the country were given a "pilot" status. From 2001 to 2010, China's R&D capability of new energy vehicles enlarged, this led to the formation of a relatively complete industrial layout. At the Beijing International Automotive Exhibition in April 2010, a total of 95 different models of the new energy vehicles appeared, 35 of them were produced in China, including BYD, FAW, Dongfeng and GAIC.
Harvest (2012 – 2015)
The State Council promulgated the "Energy efficiency and new energy vehicle industry development plan (2012-2020)" in March 2012. This document can be regarded as the highest program document for the development of new energy vehicles in China. The technical path, industrial goals, infrastructure, fiscal subsidies and financial support were systematically planned.
The "Regulations on the management of newly built pure electric passenger vehicle enterprises" issued in June 2015 provide favorable conditions for new vehicle manufacturers to enter the market. At the same time, the new "Regulations" encourage companies to construct charging facilities by offering exemptions from purchase taxes and other policies to further promote the implementation of electric (new energy) vehicles.
Under the policy guidance of a large number of subsidies, no restrictions on driving and no restrictions on the license plate, the explosive development of China's new energy vehicles in 2014 – 2015 was directly caused. At the same time, some doubts popped up: large-scale subsidies sometimes don't really stimulate the development of the industry. Another possible problem is fraud.
Selective breeding? (2016 – 2020)
Data published by the IEA show that new registrations of electric cars hit a record in 2016, with over 750,000 sales worldwide. With a 29% market share, Norway has incontestably achieved the most successful deployment of electric cars in terms of market share, globally. It is followed by the Netherlands, with a 6.4% EV market share, and Sweden with 3.4%. China, France and the United Kingdom all have an electric car market share close to 1.5%. In 2016, China was by far the largest electric car market, accounting for more than 40% of the electric cars sold in the world, the number is more than two times bigger than in the United States.
In 2016, the three ministries and commission mentioned above-issued documents stipulating subsidy standards for the promotion and application of various models of new energy vehicles in 2016. The subsidies for 2017 – 2018 are set to be shrunk to 80% of 2016 level, as for the next two-year period, they will be dropped even more (60% of 2016 level). The main purpose of the program is to adjust subsidy policy and strictly investigate enterprises in order to detect and prevent possible fraud; Moreover, the government is willing to establish new and improve existing standards and regulations, create access and punishment mechanisms. These changes may lead to the qualitative shift in terms of technological improvement, as well as maturity and market attractiveness of final products.
New kids in town
The amount of money raised during the funding rounds is always a bellwether of how financial markets currently feel about a certain venture. Depending on the role a particular industry plays in society, some companies could be hyped by short-term trends and, consequently, overestimated. The last statement is perfectly shown by a number of the latest IPOs.
We believe that the automobile market is what can't be too overhyped due to several reasons: the final products are tangible, market demand is comparatively easy to assess, competitive landscape changes rather gradually. Thus, valuation is given by those conducting the pre-IPO rounds often defines a plausible range, and funding history in the auto industry indicates the real situation more or less precisely.
The five companies (NIO, Xpeng Motors, WM Motor, CHJ and SITECH) gained more than USD 8 billion from investors over the last five years. NIO, Xpeng Motors (est. in 2014) and WM Motor (est. in 2015) has already become unicorns (that is usual for the auto market, where production costs are high); CHJ and SITECH are close to the status. Important to stress that the players are scattered geographically: NIO and WM Motor are registered in Shanghai, while Xpeng Motors started its route in southern China, headquartered in Guangzhou. CHJ and SITECH are based in the Northern Capital, for now, the two are comparatively small and mostly aimed at the neighboring provinces as the end market. The ways these five companies walk through seem to be alike, so we took NIO as an early-comer to follow its track into the forest of the Chinese auto market.
We chose three best-selling battery, electric vehicle models, to make a comparison between the global industry leader that operates in China as a foreign enterprise, the local traditional car manufacturer that lately tries to produce EVs and one of the "new kids in town" – pioneering NIO.
2018 was a turning point for the new energy vehicle development both in China and worldwide. NIO entered NASDAQ getting officially listed on the capital market on September 12. A few days later, BAIC BJEV was listed on the Shanghai A-share market and renamed the company as BAIC BluePark (600733). Unlike NIO, BAIC BJEV is backed by the capital and industrial endorsement of its parent company BAIC Group, as can be seen from their profile.
NIO released its unaudited financial report for 2018 on March 6. The data showed that in 2018, total auto sales revenue amounted to CNY 4.9 billion (USD 704 million). The annual net loss for the period was CNY 9.6 billion (USD 1.4 billion), up 92.0% year-over-year.
BAIC BJEV released its 2018 financial report on April 22: The company achieved CNY 16.4 billion in operating revenue, a 43-percent increase from the previous year. According to the report, net profit attributable to shareholders of the firm reached CNY 155 million, up 161.21% year-over-year; basic EPS amounted to CNY 0.05.
As for the increase in operating income, according to the company's officials, it happened mainly due to the increase in the scale of business. In 2018, BAIC BIEV sold 158,000 new energy vehicles (an annual increase of 53%), ranking first (for six consecutive years) in China in terms of pure electric vehicle sales and second in regard to sales of new energy vehicles.
Tesla's Model 3 sales reached a record-breaking 25,000 units in December, and its annual sales reached 145,800 units, making it the well-deserved sales champion.
NIO (and companies of the sector too) might be pushed out of the market by the global leader that is currently planning to destroy Chinese new car makers' sandcastles from inside. The risks of being outperformed by mighty BAIC and other local incumbents are high as well. But that's not the only concern.
What shapes tomorrow?
"Auto industry has always been the focus of industrial policy and market access regulation. To prevent blind investment, the state has set higher application requirements." Chen Qingtai, chairman of the China EV Committee of 100. The requirements have kept many new car manufacturers from obtaining government-issued licenses.
As of September 2018, more than 60 new car manufacturers happened to be established in China, and only eight of them have passed the examination. Most of them have been shut out. While the qualification of car manufacturing is a dark cloud hanging over all new car manufacturers, it is a hurdle that must be overcome before mass production and delivery to users.
In addition, infrastructure construction, vehicle technology, battery range and safety are also issues that new car manufacturers have to overcome in a few years, or immediately. In March, Zhang Wei, chairman of Co-Stone Capital said that none of the Chinese new car manufacturers was worth investing in.
Data from the EVCIPA's analysis on the annual increment of public charging piles in China in the past three years, it can be found that from 2016 to 2018, the number of new public charging piles will be about 90,000 every year, with an average increase of 7,500 every month.
Future possible effect originated from the technology-related trends seems to be blurry as every minor step has the potential to become a game-changer. For instance, Swiss startup Innolith claimed to have invented a new type of battery that can power the electric car for 1,000 km without interruption. Supposedly, a breakthrough might happen at any of the three levels of the EV production process: upstream (motor raw materials, lithium battery), middle stream (battery, motor, electric control) and downstream (charging network, OEM). Autonomous driving is the next dimension to compete in. The global behemoth has been doing a good job here. Chinese new auto manufacturers are yet to catch up.
Regarding market rivalry, it is hard to predict where the future lies, but naming some core fields that define the shape of the battleground is essential. The indirect competition will still be largely represented by conventional automobile producers that may make some moves such as HEV production and pilot EV projects. "Hydrogen threat" is another potential force to influence. Some countries have already started betting on it excessively. At the moment, it is too costly. Given the fact that the source of energy driving a vehicle is the last thing mass consumers think of, this problem is crucial.
Do we expect them to conquer foreign markets? Barely. EVs don't operate normally without the appropriate infrastructure that mostly refers to charging stations. So, talks about pouring into new countries in the short term are pointless. Though, countries like India might have a similar situation soon, facing ecological crisis. As Chinese experience has shown, investment and state support are those helping hands that new EV enterprises have to rely upon.