Analysis
17 Apr 19

EVs in China: trouble in paradise?

It’s almost on daily basis that new EV models, brands or joint ventures are announced in China and frankly, even for the trained eye, it’s hard to follow who’s doing what and who’s funded by whom. Frequently, the same names come back (Tencent, Alibaba, Evergrande), often it’s one of the existing Chinese carmakers who buys or creates a brand (Geely recently announced its new EV brand “Geometry) and then there’s a bunch of start-ups, all of them hungry for a piece of the EV pie.

And here’s the question: China is big, but is it big enough for all of them? Is the Chinese EV market a bubble or will competition benefit the consumer?

Entrepreneurial China

First, an example to help us understand China. China has expertise in mass production; almost anything, especially tech and software, is available off the shelve and can be marketed easily. Some examples? Let’s say you’d like to start a telematics company. In China, you’d log in to your Alibaba account, get yourself a couple of thousand OBD devices (a pretty advanced one goes for about USD 4). Then you visit any of the 100s of software providers that offer platforms for telematics. The investment is give or take USD 6000, including mobile phone and tablet app. Congratulations, you’ve upgraded yourself to a telematics provider. Time for a fancy logo and some marketing.

This is a very simplified example to illustrate entrepreneurship in China: due to its market size and tech hunger, there is an unwritten rule that everyone can become the next WeChat or Didi. For Chinese entrepreneurs, funding is not meant to be spent on R&D, but on marketing: with a small budget, you’d sell your product in your city (10 million potential customers) – with a big budget, you’ll sell across the nation (a billion potential customers).

Reversed funding

But then there’s car manufacturing, a completely different ball game. Essentially, and again simplifying, most of the investment goes to R&D and not to marketing. And that’s just to finish the prototype, not even thinking about production. Even the successful start-ups, such as Faraday, struggle to translate a prototype into mass production; Byton has recently announced it’s seeking another USD 700 million to start production in 2019.

This should be a wakeup call for newer contenders, but it’s not. Li Xiang, founder and CEO of Chehijia (another EV start-up) rightly says: “Start-ups need to secure their funding within the next year or risk being wiped out.”

Some numbers

There are 486 EV manufacturers in China, triple of the 2017 number. The market for EVs in China is predicted to reach 1.6 million units this year, which comes down to about 3,300 units per OEM. By 2025, the EV market will reach 7 million units per year; that’s 15,000 units per OEM. Those familiar with car manufacturing will notice right away: 7 million production is good for 20 or 30 manufacturers, not for 486.

Hit quick or quit

This is what the bubble is all about: once the first and more successful start-ups go bankrupt, investors will not only lose money, but also the appetite to continue investing. Bad news for the EV business, for sure, but there’s another dimension to this. It’s unlikely in any other business that an iPhone manufacturer, an e-commerce holding, a chat application and a real estate business are competing in the same business, but this is the reality in China, where Foxconn, Tencent, Alibaba and Evergrande are behind one or more EV businesses.

In other words, the game is played not only within the EV industry, but also on a larger scale. The mega-funders aim multiple targets at the same time; they fund smaller start-ups, collaborate with OEMs, even collaborate with each other. It makes them look like, at least from a distance, gamblers at the roulette table, playing different numbers and colours, ready to take a loss, but aiming to win somewhere.

The pessimist’s view

So, to cater for the bubble-believers, the start-up community might collapse and only a few – read: those with enough funding – will survive. When it comes to funding, the “true” OEMs might be the strongest. These are Chinese, state-owned OEMs, large and wealthy organisations with an existing R&D department, experts in production and distribution or international OEMs, equally wealthy and aiming to ramp up their global EV production via China.

In this scenario, the predicted volume of 7 million EVs will be nicely shared amongst what are basically the players of today plus a handful of survivors, such as Tesla, BYD, Byton and Faraday. New brands will appear, but most likely these brands will be fully owned by OEMs, such as “Geometry”.

The optimist’s view

But there’s something else that comes to mind: the Chinese model. The challenges for today’s EV start-ups seem to be funding for R&D and mass production. China might very well be moving into an off-the-shelve model for EV development. What this could mean is that, rather than developing the entire car, an EV manufacturer could have access to an increasing percentage of off-the-shelve technology and have mass-production outsourced to providers.

This model exists already, and not only in China; in the mobile phone industry, components are readily available. Chips, screen technology, cameras and batteries can be acquired from the Samsungs of this world and the originality and commercial success of a new mobile phone brand comes essentially from form factor, branding, packaging and marketing. A similar model might work in the EV industry.

So what?

Most probably, we’re heading for a combination of both views. Some manufacturers will go bankrupt in the next couple of years, others will be absorbed by bigger ones or start joint ventures with existing OEMs. Fact is however, that investors such as Tencent will not give up their grip on the EV market so easily: the stakes are too high. Next generation autonomous EVs will become new platforms for gaming, e-commerce and entertainment.

Finally, there are also new spaces in which new manufacturers can excel. The form factor is such a space: nothing indicates that future vehicles will look like regular sedans and SUVs. It is to be expected that we’ll move into a world of “small, medium and large boxes”. Innovation is usually the strong spot of the start-ups; those who explore form factors might very well be amongst those who survive.

Authored by: Yves Helven
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