EYESHENZHEN  /   Opinion

NEV makers enter knockout round

Writer: Debra Li  |  Editor: Jane Chen  |  From: Shenzhen Daily  |  Updated: 2022-05-23

A few days after Elon Musk praised the diligence of Chinese employees who "burned the 3 a.m. oil" at the Tesla Gigafactory Shanghai, another Chinese new energy vehicle (NEV) maker had its business license revoked in Shanghai for not operating for six straight months.

Lvchi, born in 2016 during the enthusiasm of an inflow of capital into the NEV industry, launched Urano and Venere, two concept EVs as early as 2018, working with I.DE.A. Institute, an Italian design firm established in 1978.

The company had set itself the lofty goal of delivering 50,000 cars in 2019 and 550,000 units in 2023. However, it never entered mass production before it went broke and stopped operating.

Other NEV companies, including Youxia Motors, Changjiang EV and Byton, have flopped over the past two years, when competition became fierce and resources were less easy to come by.

According to a previous announcement from the Ministry of Finance, NEV subsidies from the Chinese Government will be completely eliminated by the end of 2022, although there were reports last week suggesting that the authorities are considering extending the subsidy. The Chinese government had already sharply cut NEV subsidies in March 2019, which has left many latecomers in the sector cash-strapped.

The recent flare-up of the COVID-19 pandemic in China, as well as lockdowns and other preventive measures taken to fight it, has dented the economy and negatively affected the manufacturing and sales of automakers. Statistics from the China Association of Automobile Manufacturers (CAAM) revealed that from January to April, automakers in China had sold about 7.69 million units of vehicles, a 12.1% decrease year on year. Nevertheless, in April, the hardest-hit month, automakers sold 299,000 NEVs, 44.6% higher than the same period last year, although the figure was still 38.3% lower than March.

China's NEV market will continue to see robust growth in the next few years, according to a December 2020 report from the global market research firm International Data Corporation (IDC). The total sales of NEVs in the country will expand to around 5.42 million in 2025, and China's NEV market is expected to grow at a compound annual growth rate of 36.1% between 2020 and 2025, said the report.

Younger generations of Chinese consumers have a higher tendency to embrace NEVs, not just because they save a lot on fuel, but also out of environmental protection concerns. The government subsidy has also been a driving factor behind the growth of the sector.

Lured into the industry were those who see the huge growth potential of the NEV market. They were also tempted by the higher-than-average gross profit margins and net profit margins that could be achieved by Tesla. The gross profit margin and net profit margin of Tesla reached 29.11% and 13.51% in the first quarter of this year, while the figures for Toyota was 16.73% and about 10% respectively.

The success of Tesla is both hard-earned and lucky. Musk, who first invested US$6.5 million in the company in 2004, continued to pour cash into the endeavor along with other equity firms and prominent entrepreneurs. In 2009, Tesla received US$465 million in loans from the U.S. government as part of the loans to bail out companies in the aftermath of the 2008 financial crisis. In 2010, Tesla was lucky to win the favor of a Toyota heir and for only US$42 million, bought from Toyota what would later become the Tesla Factory in Fremont, California.

Things were not all smooth for Tesla even after it went public on NASDAQ in 2010. In 2017, when Tesla failed to deliver the 455,000 reserved Model 3 cars on time, it was one of the most shorted companies on the market. After lengthy negotiations with the Chinese Government, Tesla began to build its fully-owned Shanghai factory early 2019, which was completed in just 10 months and provided a huge boost to its production.

With the rapid emergence of foreign, joint venture (JV), and local brands, China's NEV market entered an era of intense competition from 2020. Only the smartest and most profitable will survive.

The key differentiators of NEVs will be smart and connected functions as well as human-oriented design. Automakers need to balance user experience and cost efficiency. Cost control and supply chain management will be their essential core capabilities.

Statistics revealed the top three NEV makers who sold the biggest number of cars in the Chinese market last year were BYD, Shanghai General Motors Wuling (SGMW), and Tesla China. The top ten list included the NEV divisions of traditional automakers such as Great Wall Motors and GAC Group, as well as new Chinese brands NIO, Li Auto Inc. and Xpeng Motors.

Two other high-profile latecomers in the arena are Xiaomi Auto, backed by smartphone maker Xiaomi, and a joint venture of internet firm Baidu and automaker Geely.

It remains to be seen who will survive this race against time to emerge as winners in the Chinese NEV market. But whoever wins, it will be a strenuous and tough journey.

(The author is an editor of the Features Department of Shenzhen Daily.)