While Tesla waits for China, local EV start-ups mushroom

• Chinese government’s drive for EVs, in line with the ‘Made in China 2025’ vision
• Impact of the change in government policies on local and foreign players
• Rise of several start-ups, while Tesla plans it moves to China as per the preliminary agreement  
• Future challenges

In Televisory’s earlier blog (Electric vehicles revolution, China leads the global boom), we explained how electric vehicles (EVs) are revolutionizing the transportation sector in China, which accounts for half of the world’s EV sales. The country aims to dominate the world market with its ‘Made in China 2025’ vision. It is due to the strong government support (owing to green car policy initiatives) as well as an attempt to reduce dependence on oil imports, the country aims to increase the production of NEVs (new energy vehicles) to 7 million in 2025 up from about 500,000 in 2016. The government’s carrot and stick approach for adoption of EVs at an accelerated pace have created new opportunities for businesses including domestic players (BAIC Motor Corp, BYD), global players (Tesla, BMW) and start-ups. According to Bloomberg, there are currently around 487 EV businesses in China, with the industry getting increasingly competitive and crowded.

The Chinese government reformed its previous regulation on necessitation for overseas automakers to form JVs with Chinese partners in order to manufacture automobiles locally, this was done in lieu of its ambitious aim back in April 2018 just prior to the ongoing China-US trade dispute. Although this deregulation currently applies to EVs, it will gradually follow for commercial vehicles (2020) and for conventional passenger vehicles (2022). Moreover, with the intent to further open up the Chinese economy, the government slashed tariffs on imported cars to 15% from 25% in July 2018. However, owing to the trade dispute between the two nations, the US automakers could not enjoy the relief for long, China slapped an additional punitive 25% tariff on auto imports (on July 06, 2018), thereby levying a total steep tariff of 40%. Among other US automakers, the cash-constrained Tesla, which considers China as an important market for the company was bound to be hit by such a move. In October 2018, Tesla managed to reach a preliminary agreement with the Chinese government to build the country’s first car-production facility, which is wholly-owned by a foreign automaker. The company was keen on setting up its production facility for quite some time since its car sales turned out to be extremely popular in China, with sales amounting to $2 Bn in 2017 (most notably the Tesla Model X SUV model). Hence, with the agreement in place, Tesla expects to start production of its cars within two years of the commencement of construction, which will be followed by churning out of c. 500,000 cars in about 2-3 years. This could be a turning point for Tesla as once the production starts, it might benefit from the exemption on import taxes, thereby enable it to narrow the gap between the price charged for the Tesla X (currently being sold ~900,000 yuan or ~$130,000) vis-à-vis the price of a SUV charged by a Chinese EV start-up (~$30,000-$60,000) and similar other models.

While Tesla waits for production to start in China, several start-ups have mushroomed locally and are working to becoming China’s answer to the competition posed by players like Tesla and other major international giants moving into the EV space. These local players envision to provide a user with an overall ecosystem, wherein a car is capable of driving itself, while a user is able to do everything from sleeping to watching a film or take conference calls within a comfortable and sophisticated environment. Among this is a four-year-old start-up that has gained the limelight; ‘Xpeng’ is backed by the likes of Xiaomi Corp., Alibaba Group Holdings and Foxconn Technology Limited. The start-up is valued at close to $4 billion despite not delivering a single vehicle nor owning a factory or a production license. On similar lines, Nio (formerly NextEV) is another Chinese start-up that is backed by Tencent, Baidu and Xiaomi. Nio plans to sell a connected car attached with an array of product offerings and services. The proposed car would be loaded with technology, driverless capabilities, NIO power (a 3-minute battery swapping service), NOMI; an AI (artificial intelligence) assistant (similar to Amazon’s Alexa) and an NIO app that will allow users to chat with the company’s executives, arrange car service, attend events or charging requests. Nio is among the first lot of Chinese EV makers that have launched a production vehicle, while the rest have displayed concept cars. The company launched the ES-8 pure electric model (sports utility vehicle) at around half the price of the Tesla X in December 2017, thereby enhancing its appeal. It is not only restricted to the local market, but Nio has also vowed to bring autonomous EVs to the US by 2020. In order to achieve this, the company has filed for an IPO on the Nasdaq in August 2018. Tencent has not invested in only just Nio. The company also backs Byton (to indicate ‘bytes on wheels’) led by a team including former executives of BMW, Tesla, Google and Apple. The company aims for a 2019 launch in China and plans Europe and the US by 2020. Byton’s cars use facial recognition to unlock, the system adapts to the driver more and more as it gets to know the driver as well as offers a range of other ways for interaction by deploying technologies like Amazon’s Alexa, gesture and touch controls. It is interesting to observe how most of these EV start-ups in China are yet to even manufacture on scale or deliver in bulk to consumers, but still has not stopped the market in valuing these at several times higher than the value of traditional Chinese automakers such as Great Wall Motor Co. and BAIC Motor Corp in the recent fundraising rounds. 

Hence, how is it that these start-ups have garnered funding from the likes of Alibaba and Tencent? This is because these tech giants have forayed into the automotive industry with the conviction that connected cars are the future and an additional source of revenue generation for their portfolio. China has capital, lots and lots of capital to be burnt. The sector has received funding from investment funds as well as online service companies, thereby giving birth to around 100 start-ups in the field alone. China’s generous use of subsidies has given birth to several start-ups, many of which then require a helping hand, more importantly, the two key licenses mandated to manufacture and sell pure EVs. Additionally, procuring these two licenses is both expensive and time consuming with young ventures instead preferring to divert the money towards R&D. This has thereby resulted in some of these start-ups partnering with well-established or state-owned automakers, which do not need such licenses. In addition, the ones that do, however, manage to procure these licenses from the government tend to be either JVs or subsidiaries of state-owned automakers. Few examples are Nio, which partnered with JAC Motor (a state-owned company with about 50 years of experience), BJEV is under BAIC Group, while Yundu New Energy is a subsidiary of Fujian Motor, which is again state-owned.

On a broader perspective, producing and delivering cars at a scale seems to be tougher than simply raking in millions from investors as some start-ups are struggling to keep with the schedule of their initially promised deliveries. Addedly, one cannot deny the risk associated with these novice start-ups with limited experience in the automobile field. Thus,  in spite of these start-ups claiming to offer superior technological advancements in their offerings, they could very well feel the pain and issues faced by the other major EV manufacturers, especially Tesla, which has faced a plethora of problems of its own, more specifically the production lag on its different models in last few years and lately the much-talked Model 3. That being said, with China’s recent move to open up its rather protected automotive market for foreign players, time is ticking for these start-ups to ramp up their deliveries, this is pertinent as with just another couple of years down the line, companies like Tesla would add to the fierce local competition rather than what was faced in the past from foreign players.