The Reality About Chinese Electric Cars Could Surprise You

FEB 11 2019 BY BRADLEY BERMAN 43

Ninety-percent of EV companies will fail in the next few years. And it’s a good thing.

China is the world’s biggest market for electric cars. As the Chinese government continues to push for more EVS, its influence on the global vehicle market can’t be overstated. And yet, we as Americans have very little understanding of how the Chinese EV market works.

To help fill in the big missing gaps, I spoke last week with Feng An, executive director of the Innovation Center for Energy and Transportation. The think tank, based in Los Angeles and Beijing, was founded by An more than a dozen years ago. Prior to forming ICET, he worked as a physicist for Argonne National Lab. An earned a Ph.D. in applied physics from the University of Michigan in 1992. Here are a few of the insights he shared.

Today’s Chinese EV Market Is Nearly All Chinese-Built Micro-Cars

China sold about 1.25 million electric vehicles last year. There’s a lottery system to significantly restrict sales of internal-combustion vehicles in China, but EVs can be readily purchased by Chinese buyers.

Don’t expect to see a lot of LEAFs, BMW i3s, and Teslas buzzing around the streets of major Chinese cities. An explained that the vast majority of historic Chinese EV sales were low-quality, low-speed EVs produced by small, unknown, indigenous Chinese automakers in second- or third-tier cities. “Most of them have been micro-EVs,” An said. (He later clarified that by the end of 2018, the share EVs represented by microcars had dropped to about 37 percent.) Between one-third to two-thirds of the cost of those subcompact EVs are covered by the government.

But things are about to change. For China to meet its upcoming EV goals, foreign brands will need to start selling EVs in the country. An said the target in actual sales numbers (not the oft-quoted system of credits) is about five percent by 2020. “China has to open the door to the multinationals,” said An.

There’s Huge Overcapacity, But That’s Okay

An said that there are currently approximately 400 EV start-ups operating in China. The majority of those companies are small shops, assemblers, and firms making commercial electric vehicles. But because it’s incredibly easy for EV start-ups to get major government support, there’s a mad rush to try to compete against the big domestics and the foreign automakers about to enter the Chinese market.

The gold rush is on. “Every city hopes to create jobs. There are 40 new EV makers in the last year or so, and each one can get a billion dollars,” said An. “That’s even if the companies and the funders don’t believe they will be successful in the long run.” He explained that most of the start-ups want to quickly flip the companies to a new investor – before China’s economy slows down.

An believes that the result is a huge overcapacity of EV manufacturing. “Ninety percent of those companies will go bankrupt in the next five years or so, if not sooner,” he told me.

So when you hear about Chinese Internet entrepreneurs and venture capitalists starting EV companies, realize that the money really comes from the Chinese government. “If you trace the venture money, it all comes from the government side,” said An. He explained that many regional governments raise money by selling land. The proceeds are invested in emerging technologies like EVs, but there is almost no concern for getting a return on investment.

The 400 or so current EV companies will get winnowed down to perhaps a dozen in the next few years, according to An.

For China, the investment is like a massive government-sponsored jobs and training program. (It’s not unlike Nevada granting more than a billion dollars in tax credits to Tesla to build the Gigafactory. The goal is to stimulate local employment in new technology.)

“From a pure economic sense, it seems like a waste of money,” he said. “But you have to invest that money somewhere. So you train a new generation of engineers.” An said that many Chinese EV companies might die, but their engineers will move on.

“I think it’s good for EVs,” he said. Just like previous oversized Chinese investments in solar panels and wind turbines, the market for electric vehicles and EV batteries will benefit. “I know that a lot of money got wasted, but it created scale. A lot of companies will go bust, but the Chinese government is doing this for the benefit of the entire civilization and human society,” he said. “It will bring down the cost of EVs and batteries.”

In the Long Run, Chinese EVs Will Become a Commodity

The cost will eventually come down so far that EVs could become cheap commodities like solar panels are today. “If you look at the future, 10 or 20 years, making an EV will offer a very low margin. Nobody will make money by making EVs. You’ll make money by providing mobility services.” He’s referring to services like ride-hailing, car-sharing, and delivery.

The combined trends of readily available capital and the shift to mobility services helps explain a Chinese EV company like Nio, which contracts out manufacturing, places more importance on the user experience than the car itself. Nio is focused almost exclusively on the Chinese market.

Don’t Fear Chinese EVs Invading the US. It’s the Other Way Around.

Feng An believes that safety and quality concerns will keep Chinese EVs from entering global markets. “Chinese don’t make the same quality of batteries like Japanese and Korean, but they are so much cheaper,” he said. Quality will come much later. First comes a rapid ramp-up of scale, as well as big reductions in cost.

None of this threatens the American or European car markets. Instead, Chinese domestic automakers should be worried about competition from the likes of BMW, Ford, and GM.

“If you are a consumer in Beijing or Shanghai, and you have the choice to buy a car made by Beijing Automobile Works or JAC Motors compared to Ford, Volkswagen or Tesla, which one are you going to buy?” An said that well before Chinese automakers can consider selling cars in the United States, they have to become competitive in China. “They first have to survive in their home turf,” he said.

Categories: China

Tags: ,

Leave a Reply

43 Comments on "The Reality About Chinese Electric Cars Could Surprise You"

newest oldest most voted

Why is that man lifting a heavy battery all the way off the ground? That’s gotta hurt after a while – and somebody else put them down there!. Somebody spend $20 on a cart!

Because he’s in China, and nobody is going to spend $20 “just” to save a Chinese workers back, sadly. Instead they will just hire a new worker once he’s worn down.

Exactly. People are a commodity in China. They are viewed as an item to be used, discarded and replaced when worn out.

That is a very good description of what US manufactures did when they burned through US employees. Then in the 80’s gutted and raided their employee’s retirement and health funds after they discarded those employees when they had worn them out, and replaced them with Chinese workers.

It is almost like we’ve forgotten who it was who closed US plants, kicked out workers, and opened new plants in China, and pretend that was something the Chinese did all by themselves without US company executives and hedge funds having anything to do with it.

Do Not Read Between The Lines

I’d be worried about the manufacturers and the manufacturing.

China has tariffs + domestic-only subsidies + mandates, which is forcing foreign manufacturers to build in China. China knows it’s the biggest market, so manufacturers feel they need to be there. And if manufacturers are there, they’re going to want to export from there.

They’ve already tested the waters with some models.

If you look at the global vehicle market, outside of temporary situations or low-volume models, very few cars actually get shipped across continents. The cost of shipping a car is just too large to make it worthwhile. China won’t change that. The Chinese EV companies *will* try to expand internationally at some point (once they have become competitive in the home market, as the article points out) — but with most of the production facilities located near the target markets, not back in China.

I think to a certain extent, you are right. It is a bit of an uphill battle for them (having to meet North American or European crash tests, and the reputation of poor quality things coming from China, little-to-no name brand recognition), but if they play it right, it could be the 1970s/1980s/1990s all over again for the North American manufacturers. They failed to recognize Asian competition twice before (Honda/Toyota from Japan, then Kia/Hyundai from Korea). One thing I see is Chinese companies purchasing large stakes in existing names – like Volvo. People recognize Volvo as being a brand, but it’s really owned by Geely. The camel has got his nose in the tent…

That however leave India, South America and Africa wide open for cars that are a lot cheaper than the North American or European models.

India has it’s own manufacturers, and even cheaper labor than China. Tata, Maruti, Chinkara, Mahindra and others.

> Feng An believes that safety and quality concerns will keep Chinese EVs from entering global markets. I think that’s wrong. BYD is already shipping electric busses around the world. They know what the international market is like. Sure maybe most of the Chinese vendors will stick to their domestic market, but it will only take two or three of them to go large in Europe and the US for it to have a very big impact on the incumbent suppliers. Compare with smartphones: there are any number of firms in China churning out cheap tablets and phones that really don’t work very well. They don’t get exported in any great numbers and wouldn’t sell well if they did. But there are a handful of companies like Huawei, ZTE, etc that are making hardware that is as good as anything from the established top-tier vendors, and selling at a much lower price. It only needs a few new entrants like this to smash through into an established industry for that industry to be seriously disrupted. So I agree with the points that the article makes about most of the new EV firms in China being likely to die, and I… Read more »

“BYD is already shipping electric busses around the world. They know what the international market is like.”

And several articles point to those buses from BYD getting a very poor reputation for quality or longevity.

Is the strong Chinese government support of their domestic auto makers really helping China to take a lead? Or is it just artificially propping up an industry with hopelessly poor production and safety standards, and by doing so, ensuring that Chinese cars will never be able to compete on the world market?

Well, “never” is a long time. But if BYDs electric buses are an example, then it may be much longer than we think before Chinese auto makers ever sell any EVs in quantity in any first-world country.

“And several articles point to those buses from BYD getting a very poor reputation for quality or longevity.”

You are obviously talking about the “Made in America” BYD buses. Yes, these buses are crap.

BYD does not make buses in the US. It just assembles them from parts shipped from China. Assessing the tone of your comment, I am 99% sure you are one of those brainwashed communist youths from China. All other commentators should read the book written by Australian academic Clive Hamilton “Silent Invasion: China’s Influence in Australia” to understand my point.

Your comment is 100% wrong, and I can only assume you are a member of China’s underpaid “50 cent army” of contractors paid to post pro-Chinese propaganda to social media.

My sympathy for your, at best, subsistence-level wages.

Well, taking the lead is actually unlikely for *any* country — the logistics of car production just do not support that. But they could very well be among the major players in the future.

And yes, domestic support is helping that in the long run. There is lots of historical evidence both from already established industries in China, and from other Asian markets in general. (Most notably Korea.)

He didn’t say the established car makers are safe — he said they are safe *for now*.

The US has a law called The Foreign Corrupt Practices Act that makes it illegal for US companies and their employees to bribe foreign officials in exchange for getting a purchase order or contract. China has no such law or restriction against bribery that applies to their domestic companies. Human nature and greed make bribes and “lavish gifts” an effective means to secure contracts and purchase orders from government officials in less developed countries over competitors who are hamstrung by laws like The Foreign Corrupt Practices Act.

I agree. If Chinese companies like BYD are able to sell 250 mile EVs profitably and quickly ramp production into the millions they could potentially flood global markets in 3-4 years time. If European and US companies aren’t ready they could be in trouble. I personally think that most of them will make it (just) but a few will collapse. 2025 could be the year of reckoning.

I think this story is not presenting a fair picture of the Chinese market, for one, it seems to be mixing the features of low-speed electric vehicles (LSEVs), which are not highway capable nor eligible for government subsidies, with regular plug-in passenger cars (which the Chinese like small). The 1 million figure for sales of plug-in pasenger cars (1.25 mi includes commercial vehicles) refers to highway capable vehicles, LSEVs sales are much higher. This recent article by Bloomerg’s NEF presents a more realistic and unbiased picture of the Chinese market:

https://www.bloomberg.com/opinion/articles/2019-02-08/china-s-electric-vehicles-put-traditional-engines-on-notic

Your article is labeled under “Bloomberg Opinion”
be careful.

Based on NEF research

Look up EV sales blog under “China” and you’ll see Emc2 is right.

To be fair, pretty much everything published by Bloomberg has a strong helping of opinion — whether labelled as such or not 😛

“…low-speed electric vehicles (LSEVs)… are not highway capable nor eligible for government subsidies…”

Can you point to an authoritative source to support your claim that low-speed EVs are not eligible for subsidies?

Everything I’ve read about the Chinese market for EVs says that there isn’t any bright line between what we here in the U.S. call “NEVs” (Neighborhood Electric Vehicles), which are low-speed EVs with limited range, vs. highway-capable EVs. In China, there is an unbroken spectrum from very limited speeds, through intermediary speeds of perhaps 50 MPH, all the way up to full freeway speeds.

In China, they are all labeled what they call “NEVs”… which there, confusingly, means “New Energy Vehicles”.

Also, you may be ignoring the fact that in China, there may be substantial goverment support (and/or protectionist regulations) at the Prefecture or municipal level. Not all subsidies for local industry come from the central Chinese government, and the way Prefectures support local industries heavily favors the small pop-up auto makers described in this article. The central Chinese government keeps trying to suppress them, to give potentially larger auto makers a better nationwide market, but apparently to little effect.

Read the NEF article, it will clarify all the questions you are raising. I am talking about the central government subsidies to new energy vehicles (NEVs)
Here is your reliable source, from Harvard University, please download the pdf
https://www.belfercenter.org/publication/leapfrogging-or-stalling-out-electric-vehicles-china

And in the next link you can read that:
However, low-speed small electric cars are not recognized by the central government as new-energy vehicles because of safety and environmental concerns. Industry experts have varied opinions on the safety and pollution aspects of such vehicles, which are mostly powered by lead-acid batteries.
http://www.chinadaily.com.cn/business/motoring/2014-01/11/content_17229981.htm

But the article above does not specify only central Chinese government subsidies. In fact, it says in part:

“…many regional governments raise money by selling land. The proceeds are invested in emerging technologies like EVs, but there is almost no concern for getting a return on investment.”

This is quite clearly talking about government support at the Prefecture and/or municipal level… which is precisely where the problem lies. The central Chinese government would like to see an end to all these pop-up, fly-by-night regional or local auto makers, because they are suppressing the market for larger, nationwide auto manufacturers which might be able to compete on the international market.

Unfortunately, the Prefecture/ municipal governments, a holdover from the days of Imperial China, are entrenched in Chinese culture, and have proven very resistant to change.

I wonder where you got that idea. Every single article I have seen about the Chinese LSEV market makes it very clear that they are a totally different category. Beside the low price, they are popular because of much lower legal requirements in terms of registration etc. — they don’t even need a driver’s license!

Odd that I have read many articles on the subject of the EV market in China without any one of them mentioning that small, low-speed EVs are treated quite differently by the Chinese government.

But I see Wikipedia’s “New Energy Vehicles in China” has a section which supports what Emc2 said above:

https://en.wikipedia.org/wiki/New_energy_vehicles_in_China#Low-speed_vehicles_and_other_modes

So I thank Emc2; I learned something today! 🙂

Until very recently LSEV’s were not recognized at all as vehicles and in fact illegal to use on the public road in most places in China. This didn’t stop Chinese citizens, mostly in rural areas, to purchase and use them. Somewhere in 2018 (october, november?, I can’t find the official communication) new legislation was applied to LSEV’s, giving them some legal status and demanding certain technical standards.

The LSEV legislation is actually linked to China’s EV-quota for regular cars. Most LSEV’s used lead-acid batteries, while EV’s used LiFePo batteries. The Chinese government aims for a leading position in battery technology and shaped the quota regulations in such a way, that EV-manufacturers are forced/pushed to adopt state-of-the-art NCM batteries. This frees up the LiFePo-supply (still a very significant portion of Chinese battery production) for LSEV’s.

You have been told about the difference in here many many times. And there is no confusion or blurred lines…

The only one confused is you. Should we give you another lesson that you once again will ignore because of…ignorance? Tesla fanboi-ism? Sinophobia? Gold fish memory (which is not fair to the gold fish, studies has shown that they easily can remember labyrinths 6 months after they first learned them)?

Thank you for sharing. Do you really think we can apply to the production of electric vehicles what happened to the production of gasoline vehicles? Would not it be interesting to imagine something different?

It’s ok to base an entire story on interviewing a single person – but you should present everything he says as gospel truth. It’s best if the journalist is prepared to challenge strange/provocative statements in real time. In any case, as Emc2 noted, it’s plain false that ” about 80 percent of EV sales are for micro-cars made in China.” Not if you refer to the 1.25 million sold in 2018, mentioned above that in the story. According to the EV Sales Blog, the world’s leading source on international EV sales, 1.1m passenger and SUV EVs were sold in China last year. The 1.25m probably includes commercial vehicles, possibly also buses/trucks. http://ev-sales.blogspot.com/2019/01/china-december-2018.html – First, of these 94% are made in China. – Second, the vast majority are medium to large 5-seaters. The only EV in the top 10 for the year that can be seen as a “microcar” is the Chery EQ, which still has 5 doors, 4 seats, reaches a top speed of 100-110 kph, and probably accelerates faster than a Prius. Either the author mixed the numbers from another source with what the interviewee said about a much larger fleet that includes neighborhood micro-EVs, or the interviewee is… Read more »

He’s probably just behind the times on the LSEV/NEV ratio. Bloomberg’s chart shows LSEVs were 80% of the plug-in car market in 2016 vs. @55% last year (see EMC2’s link above).

“…as Emc2 noted, it’s plain false that ‘about 80 percent of EV sales are for micro-cars made in China.’ Not if you refer to the 1.25 million sold in 2018, mentioned above that in the story.”

It may not be at all false if he is counting (or rather, estimating) all the cars on the road, not just what was sold last year. The market has been shifting rapidly. From Wikipedia:

About 200 thousand low-speed small electric cars were sold in 2013, and 750 thousand units in 2015. LSEV sales in 2016 were estimated at 1.2 million, while highway capable plug-in passenger cars were over 300 thousand. As of December 2016, the stock low-speed small electric car was estimated to be between 3 million and 4 million units. However the sales ratio between LSEVs and passenger NEVs began to decrease beginning in 2015. In 2014, LSEVs sales were 15 times more than normal plug-in passenger cars, but the ratio declined to about four times in 2016, and fell to 2.5 times in 2018, when about 1.1 million normal passenger electric vehicles [sic], compared to 1.4 million low-speed vehicles.

https://en.wikipedia.org/wiki/New_energy_vehicles_in_China#Low-speed_vehicles_and_other_modes

Regardless of the current and future state of Chinese EV manufacturing capability – I’m glad the interviewee is reflecting on the positive side of “failure”. Ultimately, the best EV solutions have to stand on their own, without subsidies; and those companies that find the break-through solutions will pull away from those that don’t. The best path towards EV excellence is a competition of many players where they all have an opportunity – but not a guarantee – to pull ahead. I am not against subsidies during the development stage, but the need to answer to a a competitive market drives the best solutions ahead.

Yes, I believe the phrase “creative destruction” applies.

The 1,25 million EVs sold last year in China is NOT part of this article. Those are the serious cars with quality from the established manufacturers that are called NEVs (New Energy Vehicles).

The low quality micro cars from unknown brands are sold in the millions in addition to the 1,25 million NEVs. Apples and pears…

Plenty of upstarts that will go bust for the NEVs too, but those are more aiming for the international market with western engineers, names and quality.

For most Chinese customers good enough is good enough. Yes, there are affluent populations in Beijing and Shanghai that may aspire to own a Tesla or BMW EV, but people living in the provincial cities (and these are cities of 10 million or more) and rural regions are satisfied with practical and economical EV transportation. What wasn’t mentioned here is the extremely quick adoption of electric bicycles, motorcycles and transport tricycles in all forms and shapes in China. Some cities, filled with belching smoke of two stroke engines and constant motorcycle noise 10 years ago, are now eerily quiet since almost all ICE motorcycles were replaced with EV models. These EVs are produced by a diverse cottage industry, some of them unlicensed and in it for the quick buck. Charging is cheap and almost no maintenance is needed. There is simply no emotional attachment to ICE engines, rational savings were the decisive factor. In Beijing it took me one day to spot a ICE motor scooter last year. China shows that, once a certain threshold is reached, EV adoption can occur very rapidly by consumers voting with their feet. I hope this will happen in the US too, but I… Read more »

I think some of the Chinese EV markers should have entered an overall tiny market like Norway (given crash tests are OK), and used that as a testing ground for further expansion.
Given the market for EVs.. and many EV owners in cities may care less about which brand is on the hood – as long as it does the job.

Right now I’m in Shanghai, and I can confirm there is nearly no Chinese car on the road. I ask some people why, and they told me because they are sh*t. Only Shenzhen has a lot of BYD, because of the taxis. They won’t try to conquer foreign market before they can have an acceptable part of the local market.