New Government Rules Could Wipe Out Most Chinese Electric Car Startups

Never forget that China has a “managed economy.” The national government may have embraced elements of capitalism a generation ago, but the country’s leaders are well aware of the problems that can result if capitalism is allowed to run wild. “Boom or bust” syndrome is something the government thinks is bad for the economy in general and especially bad for the burgeoning electric car industry.

To date, more than 200 Chinese startups have announced plans to build an electric car. 100 years ago, every blacksmith and bicycle mechanic in the world was busy building an automobile in the barn at night. Then they started companies to manufacture their creations. Worldwide, thousands if not tens of thousands of nascent car companies have failed over the last century or more.

China looks at the money investors lost backing all those companies that never were. From its managed economy perspective, it thinks funneling more investment into companies that are economically viable is better for the nation than throwing good money after bad and letting market forces determine the winners and losers.

Today in China, every refrigerator manufacturer, moped maker, and backyard tinkerer is jumping into the electric vehicle game. A lot of that frenzy of enthusiasm is fueled by generous government incentives that make “new energy vehicles” affordable for the masses. Those incentives can amount to as much as 60% of the sticker price of a new energy car, which has sparked a huge demand from the public. Right now in China, more than 4000 new models of electric cars are under development. Many of those small companies have no experience building automobiles. Their cars are shoddily made and service after the sale is non-existent.

The government of China says it will now pick the winners itself. Soon, entrepreneurs will need a license from the government to become an automobile manufacturer. (Existing companies like SAIC and BYD will not need to apply for licenses.) According to reports, no more than 10 licenses will be issued — a very small number for such a large country. “There are too many entrants in the sector, and some of them are just speculators,” said Yin Chengliang, a professor at Shanghai Jiao Tong University’s Institute of Automotive Engineering. “The government has to raise the threshold. It’s bad to see irrational investments in projects with low technology levels.”

335,000 new energy vehicles were sold in China last year. By 2025, the government wants that number to rise to 3,000,000 vehicles a year. It will be boom times for whichever companies survive the permitting process.

China’s Ministry of Industry and Information Technology published a draft policy document for public comment this month. It listed 17 technologies that companies that intend to sell electric cars must have in order to ensure “healthy” development of the industry. The factors include a control system for the performance and stability of any new energy vehicle, an information system that tracks the sources and conditions of key parts, and a process for recycling or reusing batteries.

Citing unnamed sources, Economic Daily, an official newspaper run by the State Council, says 90 percent of the companies currently developing EV platforms won’t be able to meet the standards in two years. A lot of money has been invested in those companies already. “There’s definitely a bubble,” said Yale Zhang, a managing director at researcher Autoforesight Shanghai Co. “If you don’t own the core technology and can’t build up the brand, it’s ‘game over’ very quickly once you burn through the cash.”

Source: Bloomberg