by Julia Pyper
April 18, 2019

The 2019 Shanghai Auto Show is taking place this week, and it's shaping up to be a race over who will own the future of electric driving in the world's largest automobile market.

Global automakers are investing tens of billions of dollars to play in China’s rapidly expanding EV market. According to a Reuters analysis, automakers are investing $135 billion to develop EVs and EV batteries in China over the next five to 10 years.

The Volkswagen/Audi/Porsche alliance is pouring $45.5 billion in the Chinese EV market, the largest amount of any automaker, as we noted in a previous Electric Avenue column. Nissan, General Motors, BMW and others are also investing in China, and made their presence known this week by putting their EVs on display at Auto Shanghai. But big global auto brands don't tell the whole story. One of the most fascinating elements of China’s EV market is its own enormous collection of domestic EV makers.

Domestic manufacturing requirements and other policy support mechanisms have given rise to a multitude of Chinese EV manufacturers, none of which are household names in America. In 2018, the production of new energy vehicles in China totaled 1,270,000 units, while the sale of new energy vehicles in China totaled 1,256,000 units — with 96 percent of sales coming from domestic producers.

There are a lot of busy automakers in China building and selling a lot of electric cars, as some global brands make their first foray into EVs.

As a follow-up to the previous two Electric Avenue columns — one that offers a snapshot of China’s EV market and another that surveys China’s EV charging infrastructure landscape — this week we'll look at what's driving the expansion of China’s domestic EV maker landscape.

How China ended up with nearly 500 EV companies

The first thing to know about Chinese EV companies: There are a lot of them.

You may have heard of BAIC and BYD, or well-funded newcomers NIO and Byton. But that list barely scratches the surface. The Wall Street Journal reported last July that there are as many as 487 EV makers operating in China. Paul Gong, an automotive analyst at UBS, said he’s unsure if this number is right. He can only name around 100 companies.

“Indeed, many companies are trying to seek their fortune in this EV mega-trend,” Gong wrote in an email. “Some will dive, some will survive, and only a few will thrive.”

The discrepancy may come down to how “EV maker” is defined. A report published last fall by the Center for Strategic and International Studies (CSIS) notes that there are “almost 500 electric-vehicle makers, of which approximately 100 make electric cars.” Other types of electrified vehicles include buses, scooters and low-speed EVs that can’t travel faster than 43 miles per hour.

For the sake of this article, “EVs” refers to electric passenger cars — some of which are small — but does not refer to low-speed vehicles. And even by that narrower definition, it’s a crowded field.

Why are there so many companies? Because the national government gave a clear signal that it wants China to lead the world in electric vehicle technology, and local governments are eager to get in on the action.

In 2010, China identified “new-energy vehicles,” or NEVs, as one of seven broad categories of “strategic emerging industries” that would receive major government support, according to the CSIS report. The NEV category includes pure electric, hybrid, plug-in hybrid and fuel cell electric vehicles. Over time, however, support has centered on fully electric cars, which has put China on track to dominate the global EV market.

Electric buses were actually China’s entry point into the NEV market. Beijing deployed 50 of electric buses during the 2008 Olympics. Then in 2009, the city of Shenzhen was selected as the first of 13 pilot cities for demonstration and promotion of NEVs in China. At the end of 2017, the city’s entire fleet of more than 16,000 buses had been converted to plug-ins (costing central and local governments $1 billion USD per year, according to the South China Morning Post).

The biggest policy shift for the passenger car market came in 2015, with the release of President Xi Jinping’s “Made in China 2025” plan, which cemented electric vehicles as a key strategic target for “domestic dominance and global competitiveness.”

A series of policies to reach those targets were laid out in China’s comprehensive “Medium- and Long-Term Development Plan for the Automotive Industry,” released in April 2017. A central goal of this plan is for total Chinese NEV production to reach 2 million vehicles by 2020 and account for 20 percent of all auto sales by 2025.

Key government policies introduced to hit those targets include: R&D funding for key technology components, emissions standards, NEV production requirements (the dual-credit system), buyer subsidies, tax exemptions, license plate restrictions, direct government procurement, and funding to support the construction of widespread charging infrastructure.

A cap-and-trade system for electric cars

CSIS estimates that the Chinese government has spent over RMB 390 billion ($58.8 billion) on policy support for EVs to date, equivalent to over 42 percent of the sector’s entire commercial activity. The Chinese government started cutting subsidies for EVs earlier this year, but continues to invest in EVs in other ways.

Last June, for instance, the National Development and Reform Commission and China Construction Bank announced a new $47 billion fund for EVs and other high-tech industries. Regional governments in China are making similar funding commitments.

A key area of investment for China has been the EV battery, which can account for 50 percent of a vehicle’s total production cost. But we’re going to save taking a closer look at the battery manufacturing piece for a future Electric Avenue column.

Investment is hardly the only form of government support. The January launch of China's minimum requirements for all automakers to produce NEVs is another major market driver. The new regime operates like a cap-and-trade system, where automakers can comply by producing enough of their own clean vehicles to meet government targets or by purchasing compliance credits from over-performing competitors.

All major manufacturers operating in China must hit the production quotas or buy the correct number of credits, which is set to increase. Also, not all cars receive the same number of credits. Pure EVs with a range of more than 186 miles will generate more credits than vehicles with a shorter range, for instance.

Companies with a head start on making NEVs will have higher credit scores entering this new system. Those top companies include BYD, BAIC BluePark New Energy Technology and Geely Automobile Holdings, according to China's Ministry of Industry and Information Technology.

Other automakers, like Toyota, will need to play catch-up. The new credit system drove the Japanese automaker — which has been notoriously slow to embrace battery electric vehicles, opting instead to bank on hybrids and fuel cells — to unveil two new battery electric cars on the opening day of Auto Shanghai 2019. The C-HR and the IZOA will be the first all-electric vehicles to launch in China under the Toyota brand.

Welcoming foreign automotive brands

To finish answering the question of why there are so many Chinese EV companies, we have to look at another important set of policy measures: mandates for foreign auto manufacturers to enter into joint ventures with local Chinese producers.

This requirement exists for makers of traditional internal combustion cars, as well as NEVs. Foreign ownership of these joint ventures is capped at 50 percent. So to get foreign manufacturers on board in the first place, China set vehicle import tariffs at 25 percent.

The restrictions for EV makers don’t end there. According to the CSIS report: “to promote technology transfer, starting in 2009 China required that the joint venture lead to new mastery of at least one of three core technologies for NEVs: the battery, the electric motor, or the inverter. In early 2017, China required that joint ventures master all three of these elements.”

EV production in China has been heavily shaped by the country’s approach to foreign manufacturers. The CSIS report includes a list of existing joint ventures on EVs in China, dating back to 1985.

In what could be a boon for foreign auto brands, China announced last year that it would eliminate the joint venture requirement for EVs at the end of 2018.

Tesla Motors has been eager to enter the Chinese market, but refused to partner out of fear of losing its trade secrets. Following the policy change, Tesla was able to break ground on its estimated $2 billion “Shanghai Gigafactory” in January 2019.

Other major automakers have also been preparing to set up large EV subsidiaries in China. Volkswagen, for instance, plans to launch 40 NEVs in China over the next seven years, and General Motors is targeting 20 new EVs in China by the end of 2023.

Easing the JV requirement doesn’t mean China’s EV market is open and ready for true market competition, however. For one thing, existing joint ventures are difficult to leave. Furthermore, “there is still a gap between being allowed to register a company and being approved to manufacture specific models or build domestic distribution and service networks,” the CSIS report states.

All of this has led to an eclectic mix of Chinese EV makers, including older state-owned entities, well-developed independent producers and a slate of new market entrants. At the same time, foreign manufacturers are rapidly expanding their market presence.

Given the policy landscape outlined above, it should come as no surprise that EV sales are so high in China and that Chinese companies are currently the top domestic sellers. But as foreign companies move in, the competition will heat up, and that could dramatically alter the Chinese EV market that exists today. There are also bigger questions looming around how sustainable consumer demand is for EVs in China as subsidies disappear.

Qiu Kaijun, who runs an EV industry website in China, claims that market shares of domestic EVs in China will be eaten up by foreign automakers starting in 2020. Chinese market experts like Gong at UBS believe that only a fraction of the Chinese EV makers that exist today will survive this shift. As for which companies will thrive, well, it's still too soon to tell.