Consolidating China's electric car sector: From three hundred to a few

Beijing wants to slash overcapacity in China’s electric car sector. Gregor Sebastian says consolidation will help the country’s major players and up the pressure on European ones. 

What China calls its new energy vehicle (NEV) sector is the world’s largest electric car market. But because it suffers from huge overcapacity and low profitability, it is a drag on China’s productivity and innovation capacity.

According to the China Association of Automobile Manufacturers, at the end of 2020, the NEV industry was running plants at only 5 percent of capacity. It had the scope to produce 26.7 million NEVs, but sold only 1.4 million – and counted only 89 of as 300 NEV makers as actually making vehicles. Economies of scale are slight, margins often tiny – and so Beijing has a huge incentive to intervene. China tried to rein in overcapacity since 2017, but its resolve failed in April 2020. Fearing that the Covid-19 pandemic could be the downfall of its globally leading electric-car industry, Beijing eased market access for aspiring NEV makers. The sector has emerged from the pandemic stronger than before: 12 percent of new cars sold in so far in 2021 have been electric and China is on track to hit its 2025 target of 20 percent. The brands BYD and NIO are thriving and a new go at consolidation could help them cement their leading positions.

Chinese companies need consolidation to stay ahead

There are two other reasons why new attempts to curb overcapacity will be more successful than before. Firstly, foreign carmakers, who in the past have profited most from China’s fragmented automotive sector, have started churning out their own electric vehicle models. Policymakers know that Chinese companies need consolidation to stay ahead. Secondly, deleveraging is firmly on Beijing’s agenda after generous government subsidies lured the likes of property group Evergrande and television giant Skyworth to the sector. It no longer wants to carry the cost and risks of these investments.

The National Development and Reform Commission is reportedly drafting measures for the NEV sector, which include minimum production-capacity utilization rates for provinces and stricter rules for allowing new projects. Also, the Ministry of Industry and Information Technology has announced its own plans to tackle overcapacity, calling on NEV players to consolidate. On top of that, the central government has shown no sign that it wants to extend the purchasing subsidies for NEVs that are due to expire at the end of 2022. This alone could usher in a market-led rather than government-directed NEV sector.  

This transition won’t be plain sailing for Beijing. Provincial governments still have an interest in stoking regional investment by NEV makers. The career prospects of regional government and party officials are linked to regional economic growth and provinces rely on business taxes to bolster their overall revenues. The same is true one level lower: local governments have encouraged investments and subsidized local firms to avoid bankruptcies, regardless of consumer demand. Nanjing, for instance, doled out subsidies to keep Byton alive for years.

Beijing has increased pressure on regional governments to curb overcapacities

But Beijing has palpably increased the pressure on the other levels of government to curb overcapacities – started to see some results. In February 2021, Jiangsu was the first province to issue a notice that criticized preferential policies that keep near or wholly bankrupt companies on tax-funded life support. It even named and shamed some completely unprofitable projects, including Byton. After suspending operations in mid-2020, the former showcase project finally sent one of its subsidiaries into bankruptcy in July of this year.

Byton might be history, but consolidation means that European carmakers will face stronger Chinese competitors. While the total number of players will go down, the Chinese companies that remain will be current the frontrunners, particularly listed champions like BYD, NIO and Geely. Foreign companies like Tesla and Volkswagen might also profit by selling more cars and buying struggling rivals on the cheap. But as EV-laggards, most European players face an uphill battle against stronger domestic champions. Also, European suppliers will need to identify which Chinese companies will most likely remain solvent.  

Chinese NEV makers will establish themselves in Europe

But this is not necessarily all bad news for Europe. Stronger Chinese NEV makers will emerge and also establish themselves in Europe. South Korean and Japanese carmakers entered global markets a generation ago, now Chinese electric carmakers look set to follow suit, although ending overcapacity shows they don’t intend to flood Europe with underpriced cars. European rivals, increasingly dependent on China for sales and R&D, will lose market share at home and cut investments in the region. But Chinese companies will bring high-quality products and new competition to Europe – and eventually also investment of their own.