Despite facing overcapacity issues during its formative years, China’s electric vehicle industry has become a magnet for investment within China and worldwide.
VCs are betting big that China will become a major profit centre for global alternative fuel vehicle production, even with the inevitable shakeout and consolidation that is sure to come over the next decade.
Various Chinese startups have announced their ambitions to attract foreign buyers beyond the Chinese borders. In 2021, Chinese electric vehicle startup Aiways forged ahead with its plan to export up to 10,000 vehicles annually in Belgium, Denmark, and Israel.
Xiaopeng Motors (XPeng) is exporting its G3i electric SUV to Europe. Foreign brands such as Tesla and BMW’s successfully exporting “Made in China” electric cars to other markets has also made it a boon to the internationalisation vision of various local players.
The state of Chinese electric vehicle startups
Local electric vehicle startups have mushroomed in the country. Around 500 electric vehicle startups had been established in China by 2019, including some 300 electric vehicle makers. The number of new Chinese firms connected to “new energy vehicles” even increased by 81,000 until mid-August last year, marking up the total to over 321,000, according to Qichacha.
“I’ve been in this industry for 30 years, and in the last couple of years, I’ve seen more change in the automotive industry than I have in the previous 28 years,” said Sam Olsen, Singapore-based Co-Founder of the strategic consultancy MetisAsia and a commentator on Chinese-Western relations.
“You’re in the middle of a very quickly changing industry and therefore, it’s not surprising that lots of Chinese startups are going to be looking at automotive.”
Given the potential, Chinese manufacturers are struggling with capacity issues as sales of non-fossil fuel vehicles lag behind production potential. According to the China Association of Automobile Manufacturers, the new energy vehicle (NEV) sector was only operating at five per cent capacity by the end of 2020.
It had the capacity to build 26.7 million NEVs but only sold 1.4 million. Even worse, only 89 out of the 300 NEV manufacturers actually produce vehicles. Data from Crunchbase also show that 88 cities (out of 655 cities as of 2016) in China are home to at least one electric vehicle startup.
China’s minister for industry and information technology Xiao Yaqing said in September 2021 that the country’s electric vehicle firms are “mostly small and scattered” and in dire need of consolidation.
Since 2017, China has attempted to reduce overcapacity; however, its efforts strumbled in April 2020. For fear that the COVID-19 outbreak might spell the end of its world-leading electric-car sector, Beijing has continued to make it easier for ambitious NEV manufacturers to enter the market.
The same is true at the municipal level. Local governments have supported investments and subsidised local enterprises to prevent bankruptcy regardless of consumer demands. For example, Nanjing provided subsidies to keep Chinese-German all-EV automotive brand Byton afloat for years.
This is because the regional government and political leaders’ career prospects are often tied to regional economic growth, and provinces rely on company taxes to supplement their overall income. In a more aggressive push, provincial authorities even encourage local automakers to expand overseas in order to ramp up economic growth in their areas.
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“There are a lot of production sites that are currently unused, partly because we have startups, but also major companies like Xiaomi or Evergrande that actually invest a lot of money into these production capacities but actually have not been selling cars yet,” said Gregor Sebastian, an analyst at Mercator Institute for China Studies. “This is a huge drain of money while China is also tackling all sorts of other problems.”
This posed a threat to the future of those “redundant” electric vehicle firms. At the moment, Xpeng, and NIO are the big names within the electric vehicle startup community. But many smaller ones that most people haven’t heard about are not making any profits. The question is what is going to happen with them in two years when the government cuts down on subsidies?
As the subsidies are phased out, and Beijing recognises that it now has a handful of its businesses selling 10,000 vehicles each month, electric vehicles may fall farther down the priority list in terms of pure investment. According to reports, the National Development and Reform Commission is working on legislation for the NEV industry, including minimum production-capacity utilisation rates for provinces and stiffer regulations for approving new projects.
The previous subsidies have given ground for the emergence of Chinese carmakers in literally all segments, which, is also complicating the competition landscape with both domestic and international players.
NIO, the Chinese electric vehicle champion, is striving to foray into high value-added luxury segments of the NEV sector, which was largely dominated by German brands like Audi or Mercedes Benz. But this company has not only been facing stiff competition with international carmakers joining the game but also suffering from competition with other local startups vying for market share.
“This fragmentation is hurting really big startups,” added Sebastian. “I don’t think they [other small electric vehicle companies] are definitely going to succeed. But as long as government subsidies fuel this fragmentation, this is also hurting them in some way.”
Chinese electric vehicle industry catches the fancy of global investors
A large amount of funding in the world today is flowing toward renewable energy. Energy transition investment hit half a trillion dollars for the first time in 2020, according to clean energy analysts BloombergNEF.
BNEF said that the world invested momentous amounts in low-carbon assets, from renewables to cleaner transport, energy storage to electric heat. Among those, companies, governments, and households put US$139 billion of investments into electric vehicles and associated charging infrastructure. This is up 28 per cent versus the previous year and is a new record.
The impetus for climate financing going into electric vehicles is obvious as transportation accounts for around one-fifth of overall greenhouse gas emissions, making it one of the main drivers of climate change.
The UN agency even warned in a 2014 report that seven million deaths each year in the world are due to tiny particulates from cars, power plants, and other sources.
“While they can’t do the job alone, electric vehicles have an indispensable role to play in reaching net-zero emissions worldwide,” Fatih Birol, executive director of the IEA, noted in the Global EV Outlook 2021 report.
The less obvious driver is attributed to the emergence of acceptable and affordable technologies for electric vehicle products and solutions, which gives investors room for a higher return prospect. To illustrate, the price of an electric vehicle battery had dropped from US$1,100 per kWh in 2010 to only US$137 per kWh in 2020 or even as low as US$100 per kWh in China, according to IEA’s report.
“With the evolution of lithium-ion batteries, the price is coming down. Also, the improvements in the electronics and powertrains products that are acceptable in performance for regular users have become available,” said Gopal.
Per data compiled by the author of this article, as of February 2022, the total funding into around 200 Chinese electric vehicle startups listed on Crunchbase amounted to US$39.75 billion, including the highest-funded electric vehicle startups such as WM Motor (US$5.3 billion), NIO (US$5.4 billion), Xpeng (US$4.5 billion) and Li Auto (US$1.2 billion).
This illustrates the strength of China’s venture capital market, which is second only to the US worldwide. However, for early-stage capital, most of it is still coming from local sources, according to data compiled by Ross Brown and Augusto Rocha.
Also Read: How electric mobility startups are tackling climate change in Asia
“Traditionally, the most money that goes into Chinese startups is Chinese money,” said Sam Olsen. “A lot of firms find it very difficult to agree to invest in China because they’re worried about political issues.”
Take the Huawei problem as an example; as one of the largest telecom suppliers in China and the world, the Trump administration cracked down on Huawei Technologies amid the U.S.-China trade war in 2019.
The firm was unable to purchase U.S.-made chips or use US machinery and software for its productions. Countries including New Zealand, Australia, and Japan even crossed out Huawei from their 5G plans.
However, in the face of the overcrowded electric vehicle startup picture and complex political landscape, international investors bet on the Chinese electric vehicle industry in a different way. They focus on state-of-the-art technologies in other niches such as public transit, battery, and charging solutions. Besides, there is also a huge interest from the Chinese government and investors looking at autonomous vehicles, LIDAR systems, and chips.
“There are a lot of startups who are trying to build premium, popular products. NIO, for example. I think that is certain niche areas where potentially even high-risk capital funding can come in,” Gregor said.
For example, some of the world’s biggest oil companies, including BP and Shell, are seeking investments in new low-carbon technologies to reduce their dependence on fossil fuels. They bolster their venture capital arms and keep a close eye on the Chinese tech startup market.
In July 2018, BP invested US$10 million in the NIO Capital US Dollar Fund to together explore opportunities in China’s NEV ecosystem.
In 2019, bp Ventures sealed a deal with PowerShare, a startup providing integrated hardware and software solutions for electric vehicle charging in China; PowerShare connects electric vehicle drivers, charge point operators, and power supply through the platforms, improving the charging experience by locating a charge point to paying for the power supply.
The VC also made a minority investment in Publisher, a Chinese startup with an innovative digital software stack that enables charging to private vehicles and fleets.
“We are not only investing in new forms of charging infrastructure or developing new electric vehicle charging hubs, but we are also investing in technologies which will simply make that transition much easier,” Sophia Nadur, managing partner at new energy-focused venture capital firm bp Ventures, stated in a Climatic talk show.
“In the area of battery technology, we are actively looking at companies that will support the delivery of ultra-fast charging options for customers and fleets.”
In the case of Shell Ventures, the VC firm joined the Series B funding round of Beijing-based XCharge, a cutting-edge electric vehicle charging solution supplier that provides customisable “one-stop” charging services to allow more successful business models.
Since 2015, the startup has deployed more than 35,000 chargers, dispensing over 20 GWh of power per month to roughly 120 electric vehicle models in Asia-Pacific and Europe. Apart from Shell, XCharge also received a strategic investment from Samsung.
A prospect for internationalisation
Driven by hyper-competition and globalisation, startups that develop their business around a new technological platform are more and more influenced by the complexity of markets, capital, industries, suppliers, and technologies.
Therefore, technology firms need to be innovative in developing their business models, but they are also required to internationalise fast and instantaneously from inception. This urges them to go international and adopt appropriate management tools with a systemic view of the firm and its environment.
XCharge, for example, decided to foray into European markets in its early days and achieved significant milestones. The innovative electric vehicle charging solution provider had an office in Hamburg, Germany for three years and will probably have branches set up in the US.
“A lot of companies become successful and then they go global, but we are in the case where we start the global business from the beginning,” said Simon Hou, CEO and Co-Founder of XCharge. “It’s a new way of building a business that is working.”
Following this path, Hou and his colleagues built a globalised team resulting in more global investors and businesses worldwide. He emphasised that China now has a talent base that is ready to make international brands. Hou himself was also an ex-employee at Tesla (China) and Mercedes Benz (Beijing).
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“If you look at car manufacturers, it’s always been international in every country. But the thing exciting about the electric vehicle business is that new entrants have opportunities and our customers are very open-minded in terms of taking new ideas and new things,” added Hou.
“China’s probably the largest automotive market globally, so you would expect to see some brands in that market. I think it’s a natural development pattern, and some will become successful.”
However, the automotive market is very brand-driven, especially for personal cars. Certain brands have built up a brand value over several decades, and that is hard to beat. In the twentieth century, automotive technology was dominated by three major geographical blocks.
They were the Japanese, the Europeans, and the Americans. Therefore, it would not be an easy game for Chinese brands to make their mark in the global market.
“It will be a harder climb for an unknown brand,” said Gopal. “But these are not one- or two-year kind of stories, companies are here to play this game for decades and we should look at how they build out their brand over time.”
To give a very concrete example, in the 1980s, Hyundai Excel, Korea’s first entrant to the US market, was not very well respected. They were considered poor quality and low reliability, though they could compete on price.
This, however, made ways for Korean brands to adjust themselves, which led to Hyundai’s heavy investments in manufacturing quality, design, and long-term research and development since 1998. According to JD Power and Associates, it is very well regarded for quality, which was even tied with Honda and second only to Toyota by 2004.
“I think it remains to be seen as to how the different brands from different countries evolved,” stated Gopal. “You also have to keep in mind that the existing players are not going to sit quietly and just let somebody else come and take their market share.”
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