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China's electric car boom is only just getting started

Assif Shameen
Assif Shameen4/29/2019 08:00 AM GMT+08  • 9 min read
China's electric car boom is only just getting started
SINGAPORE (Apr 29): Auto Shanghai, the annual motor show in April, is an icon of China’s audacious push to transform itself into the world leader in electric vehicles (EVs). Just as car enthusiasts and auto dealers go to the North American International
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SINGAPORE (Apr 29): Auto Shanghai, the annual motor show in April, is an icon of China’s audacious push to transform itself into the world leader in electric vehicles (EVs). Just as car enthusiasts and auto dealers go to the North American International Auto Show in Detroit in January and Tokyo Motor Show in October to see high-performance cars, they head for Shanghai to see state-of-the-art EVs.

Even as China has emerged as a global manufacturing powerhouse and the world’s largest car market, it is an also-ran in the global auto business. There are no Chinese-made cars on the roads in New York, Tokyo, Frankfurt, Paris or Seoul because the biggest global carmakers are America’s General Motors (GM), Japan’s Toyota Motor, Germany’s Volkswagen, France’s Renault and Korea’s Hyundai Motor Co. China’s home-made brands such as Geely Automobile Holdings and BYD Co are growing mainly within the country’s own four walls. Little wonder, then, that Beijing sees EVs as the way to leapfrog entrenched global automobile giants and provide it with a pathway to dominate the world.

Here is what you need to understand about EVs: They are not merely an end in themselves but a means to an end. Tesla and its ilk that are making electric cars do not just want to replace ­petrol-based vehicles running on internal combustion engines; they essentially see them as the first step in a three-stage move towards an overall mobility solution. There are too many cars on the roads around the world that use expensive oil, pollute the environment, cause traffic jams and mostly sit idle for over 22 hours a day. The cost of human driving is high and rising — think accidents, loss of innocent lives and, insurance.

Future of EVs

Standalone ride hailing, EV manufacturing and autonomous cars don’t make economic sense right now. But put them together and you might see something akin to a profit machine. Here is what the future will look like: As Transportation-as-a-Service evolves, we will see electric cars increasingly acquire more autonomous driving functions and be available eventually as subscription-based robotaxis that will help the transformation from the traditional car ownership-based business model to a cheaper, far more efficient car-sharing model.

Globally, 86 million passenger cars were sold last year, down 0.5% over 2017. Car sales worldwide are forecast to decline up to 3% over last year. Of the total passenger cars sold last year, just 2% were EVs. China made up more than half of all EVs sold worldwide last year. Beijing wants annual sales of EVs — including pure-battery electrics, plug-in hybrids and fuel-cell cars — to reach seven million units by 2025, or roughly 20% of the Chinese market. This year, two million cars sold in China will be EVs. Beijing expects electric cars to reach 12% of new car sales by the end of next year.

“Demand for EVs is accelerating faster than anticipated,” says Mark Newman, an analyst at Sanford C Bernstein in Hong Kong who covers the Asian EV and batteries sector. China, he says, is well on track to meet its 2025 goals for electric cars. Though China’s game plan is to dominate the global auto industry, new EVs also help eliminate air pollution, a huge issue in the world’s second largest economy. Emphasis on EVs also helps cut the country’s burgeoning oil import bill.

Electric cars, in China and elsewhere, have had such traction mostly due to ­“carrots” of subsidies, or “sticks” in the form of EV credits. Governments around the world are rolling back subsidies. The US completely removed EV subsidies this year. China will accelerate its phased subsidy cuts in the second half of this year. That is slowing the growth of electric car sales slightly, but EVs are still steadily increasing their share of the total car market as sales of cars with internal combustion engines continue to decline.

But increasing use of EV credits is helping force more traditional carmakers to boost their own electric car production. At Auto Shanghai, Geely, which owns 49% of Malaysia’s Proton, unveiled its new EV brand Geometry. Chinese carmakers must buy the equivalent of 10% of their fossil fuel vehicle sales as EV credits, rising to 12% next year. That means a carmaker that sells 100,000 cars would need 12,000 EV credits next year. Automakers can earn EV credits by making EVs themselves. Building plug-in hybrids earns two credits per car; pure battery-powered ones, six credits per car.

Europe has similar emission fines. Fiat Chrysler Automobiles recently struck a deal with Tesla to count Tesla cars as part of its fleet in the European Union, lowering its average emissions output ahead of strict new EU regulations coming in 2021. Tesla will earn hundreds of millions of euros from the sale of those emissions credits.

EV upstarts

The oldest EV player in China is BYD, of which billionaire US investor Warren Buffett’s Berkshire Hathaway is a shareholder. In September 2008, just days before the collapse of the venerable US investment bank Lehman Brothers triggered the global financial crisis, Berkshire bought a 9.9% stake in BYD for HK$8 a share. BYD’s stock soared 11-fold over the next 12 months, but were soon languishing fairly close to the price Buffett paid. Since then, BYD, which makes cars that run on petrol-based internal combustion engines, has boosted its EV production even as it loses market share to a host of EV upstarts that have raised tens of billions of dollars. BYD stock is still 37% below its 2009 peak.

Among the better-known upstarts is New York Stock Exchange-listed NIO, which launched its IPO with much fanfare last September. NIO priced its IPO at US$6.25 per share, valuing itself at over US$6.4 billion. The stock initially soared, more than doubling in its first week, but has since plunged. It was trading around US$4.43 this past week. The roller-coaster ride of BYD and NIO stocks encapsulates the travails of China’s EV makers.

Like other Chinese EV startups, NIO does not have its own factory. It leases assembly lines from other car plants. Last year, it churned out 11,000 units of the EP9 sports car. Soon it will begin rolling out a sedan and an SUV. Yet, NIO is just one of nearly 500 registered car manufacturers that are taking a page from the Tesla playbook, raising money from investors and having new luxury EVs on the drawing board. Instead of regulating the horde to avoid cut-throat competition, Beijing has allowed a thousand electric auto flowers to bloom. China’s electric car gold rush reminds Americans of a time when horse-drawn carriages were going out of fashion 130 years ago. Between 1890 and 1960, over 3,000 carmakers were registered in the US. Only three still make cars.

Car designers in US or Europe, or engineers that have worked on EVs at Tesla, GM or Nissan Motor Co in senior positions are in high demand in China right now and can command compensation that few Silicon Valley firms would pay. Analysts expect most of the Chinese EV startups will fail to produce even a single car because they will not be able to raise enough capital. Still, nearly a dozen start-ups displayed their maiden models at Auto Shanghai. Among them was Xpeng with sleek Tesla Model 3-lookalike P7, as well as Qoros Auto, which introduced its futuristic Mile II with falcon wing doors that resembles Tesla’s Model X, and Enovate, which unveiled its ME-S sports car. Others such as Youxia Motors, WM Motors, Toyota’s partner Singulato Motors, smart electric car maker AIWAYS and Qiantu Motor that few outside China have heard of, are expected to launch their own new models soon.

To spur competition and facilitate transfer of technology, and indeed grow an ecosystem of electric and autonomous cars, last year Beijing allowed US electric car maker Tesla to set up the first wholly foreign-owned car plant in China. Until then, GM, Volkswagen and other foreign firms had made cars in China only through joint ventures with Chinese automakers. China is laying out the welcome mat for Tesla because it wants to be the global centre of EV manufacturing. Moreover, Tesla is a niche player and is not seen as a threat to large Chinese automakers.

Tesla is already trying to differentiate itself from traditional carmakers such as Volkswagen and GM, which have just begun rolling out their own EVs. On April 22, CEO Elon Musk said the EV pioneer will launch the first robotaxis as part of a broader vision for an autonomous ride-sharing network in 2020. Tesla is embracing higher levels of autonomy and ride-sharing as ­others play catch up in its core EV business. Musk may not be able to meet his ambitious 18-month deadline of a million robotaxis, but you can bet they will be on the streets in two to three years.

Yet unlike Tesla, which is moving to ­autonomous cars, and by extension, robotaxis, so far China’s new breed of carmakers have focused on just electric cars. Search engine giant Baidu is working on its own autonomous cars, while ride sharing in China is dominated by Didi Chuxing, although Alibaba Group Holding and Tencent Holdings are funding new rivals. Eventually, if the business model of electric, autonomous and shared vehicles is to work in China, the new breed of Chinese EV makers would have to work with Baidu, Didi, Alibaba and Tencent.

So, how should investors play China’s EV boom? The way they might in a gold rush — by avoiding the goldminers, or the EV maker such as BYD, and buying the makers of picks and shovels, or battery makers such as China’s Contemporary Amperex Technology Co, now the world’s largest. CATL is not just a supplier to Chinese EV makers; it has signed up Volkswagen and BMW, which will launch their EVs later this year.

China has a clear lead in electric cars. But that’s just one piece of the jigsaw puzzle. Whether it can build on that and dominate as the leader in global transportation solutions will depend on just how quickly, and how well, its EV makers mesh their own expertise with those that have built autonomous vehicles and ride sharing platforms.

Assif Shameen is a technology writer based in North America

This story appears in The Edge Singapore (Issue 879, week of Apr 29) which is on sale now. Subscribe here

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