Signs of Deflation in China’s Electric Vehicle Market

The biggest market for electric vehicles in the world is moving past its initial stages of being overcrowded.

China’s explosives industry, which more than a decade ago was crammed with government subsidies, now includes about a hundred manufacturers producing purely electric and rechargeable hybrid models. Although the number is less than the approximately 500 registered electric vehicle manufacturers in 2019, the end now seems to be in sight for more.

The peak market moved from formally overcrowded to moderately concentrated in the first quarter. This was based on the Herfindahl-Hirschman Index, which is used by researchers and regulators to assess competition and measure market concentration. The biggest winners are the players already at the top, such as BYD Co. and Tesla Inc., which have consolidated their power.

According to Wang Hanyang, an auto analyst at Shanghai-based 86Research Ltd., “80% of new energy vehicles, if we count them all after the initial subsidies, have exited or are exiting the market.”

That’s not good news for struggling players such as Nio Inc., which has seen slumping sales and said last week that Abu Dhabi’s government would take a 7 percent stake after a capital increase. Just two years ago, Nio founder and CEO William Li was mobbed by fans at client gala dinners, and the company was on the upswing after he had already escaped one near-death experience that was patched up with big money from the Hefei city government.

The Herfindahl-Hirschman index shows a clear trend of consolidation over the past several years, leading to the emergence of new players as China unveiled plans to support cleaner energy vehicles with government subsidies and other sweeteners.

The squeeze has only intensified over time, with dominant players consolidating their positions and smaller companies struggling to survive. The market share of the top four players in unit sales rose to 60 percent in the first quarter of 2023, compared to 44 percent in the same period three years ago.

Although China extended tax breaks for consumers who buy new energy vehicles until 2027, all signs point to the government not continuing to support struggling automakers. The consolidation tail of market forces and regulatory mechanisms will help make surviving brands internationally competitive, said Xin Guobin, an official of the Ministry of Industry and Information Technology.

BYD, backed by Warren Buffett’s Berkshire Hathaway Inc., has seen its dominance rise over the past two years. More than one in three NEVs sold in China today is from a Shenzhen-based company, up from less than 15% in late 2020, when the clean car market began to steadily sell more than 100,000 units each month.

Its success even squeezes the market’s No. 2 player, Tesla, which gradually lost share over the past two years until its breakthrough in the first quarter. Now it is poised to grab around 11% of the pie, giving the two leaders nearly half of the market.

Meanwhile, some of the industry’s early crown jewels have quietly disappeared. Many early EVs were built primarily to obtain subsidies and meet regulatory requirements, and often did not offer high quality design and performance.

“We call them regulatory cars,” said Jochen Siebert of Singapore-based auto consultancy JSC Automotive, referring to vehicles sold mostly to fleets designed to meet fuel consumption rules and collect new energy and other subsidies. “The only important thing was that they had to be an electric car.”

Demand for these vehicles began to wane as requirements grew, competitors emerged and the Equipment Market became saturated.

Zhidou Electric Vehicles Co., a Ninghai manufacturer once backed by Li Shufun’s Zhejiang Geely Holding Group, sold a total of about 100,000 vehicles with a range of just 62 miles (100 kilometers) on a single charge between 2015 and 2017. the microcar maker quickly lost momentum after China ended subsidies for electric cars driven less than 93 miles between charges in 2018.

Similarly, Beijing Electric Vehicle Co., the electric vehicle division of state-owned BAIC Motor Corp., which led pure electric car sales for more than five years targeting mostly fleet owners, began reporting losses after the subsidy was cut. It later changed its strategy.

Byton Ltd., founded by former managers of BMW AG. had to suspend production before delivering its first car, while Zhiche Youxing Technology Shanghai Co., which originally planned to list on China’s Star Board in 2019, was close to bankruptcy in 2022.

But the market is far from easy for automakers, which are trying to attract customers rather than meet regulations.

One of the latest corporate victims of the slow-motion shakeout was WM Motor Technology Group Co., a Shanghai-based electric car maker backed by tech giant Baidu Inc.

About a month and a half after the company announced in January that it would use a reverse merger to go public in Hong Kong, reports say it is cutting wages and making layoffs. Sales have collapsed.

Freya Cui, a resident of Shijiazhuang, northern China, and one of the earliest owners of WM Motor’s EX5 sports utility vehicle, had to walk out of her four-year-old car in April because of battery problems.

The dealer told him a replacement wasn’t available due to the company’s financial problems, and his wasn’t the only case. Buying a new battery from a third party would cost even more than the original cost of the vehicle after the subsidy, he said.

After several unsuccessful attempts to reach WM Motor or its CEO Freeman Shen on social media, Cui bought a cheap gasoline car for commuting while offering hope for the company’s recovery.

“I placed the order even before I saw the actual car, and the battery life warranty was a huge plus for me,” Cui said. “Who would have thought that one day the company would be on the verge of collapse?”

WM’s fortunes are steep. The once-lauded company received two of the top five venture capital investments by deal size in the clean car market in China as of 2018, according to capital markets data provider Preqin. Investors in the deals executed in 2020 and 2021 ranged from leading state-owned banks to technology companies.

It is difficult to say whether the pace of market consolidation will continue amidst the consumer interest in electric cars. Retail sales of new energy vehicles in China rose to 580,000 units last month, but accounted for only a third of total passenger car shipments, data from the Passenger Car Association show.

Siebert expects that in the early stages of electric cars Discovered cool features such as autonomous driving functions, large built-in screens and even karaoke systems will give way to safety, performance and durability. This change can offer legacy car manufacturers such as Volkswagen AG. advantage.

“The next five years are crucial,” he said.