Having been in the technology market through the heady days of the late 1990s and seen the carnage after the dot com bubble bursting, it is interesting to see a similar pattern happening with the China automotive market.
To recap and describe a bit of history, the China market had been effectively closed for decades with joint ventures to build cars between the larger US and European marques and local companies. I remember seeing what I thought was a Jeep Cherokee XJ when I first went to the mainland in 1997, in fact it was a BJ2021 by the Beijing Jeep Corporation, a joint venture between BAIC and American Motors Corporation (prior to their acquisition by Chrysler).
Once China had figured out how all the components fitted together, they started to design their own cars with external influences and local requirements. In effect, the market in China was where the US and European market was a century earlier and in a similar position where a primary fuel source was beginning to become dominant. Initially it was oil based fuels, thanks in part to lobbying of governments with regards to taxation and so the vegetable based fuels, steam and electric power dropped by the wayside. Today, it is the return of electric power that is expected to be the dominant future fuel and China has stepped in with both feet.
Like the late 1990s in technology, there are many small players all competing for a share of the consumers wallet. The bigger players like Geely, BAIC and SAIC have agreements with other larger manufacturers to produce a mix of cars, hedging their bets or simply generating revenues to build the new vehicles. There are many others ranging in size from BYD, Byton, NIO, Xpeng and WM Motors who are focusing more on electric vehicles. Then there are companies like Faraday Future, founded in the US by a Chinese national, who are about to start production and sales.
Recently Motoring Weekly wrote an article about BYD and Tesla with their expansion plans and new factories being built – Tesla want to get in to the China market by assembling cars locally. China is a massive market with over 700,000 electric vehicle units sold last year and that was expected to rise to well over one million very quickly. China’s economy and the wealth of the citizens is fuelling this market.
Unfortunately that fuelling of the market is also bringing in some rogue operators who are restructuring old companies to make them look like a technology company so that they could benefit from investment that ultimately turns into a fraud. All electric car companies need vast investment to kick start them – factories are expensive and so too are the components if they cannot be bought in bulk. An example of this is Tesla: they committed to buying components at a price/volume rate that made the Model 3 more expensive to produce than it should have been as production continued. Had they bought lower volumes initially, they would not have been tied to a higher price.
Like many other countries, the Chinese government decided to provided subsidies to encourage people to buy electric cars. They were under pressure to clean up the environment – I well remember staying in a hotel in Beijing and not seeing the building next door due to smog! Subsidies do two things: firstly they encourage people to buy the product that the subsidy is helping and secondly, it can help an unscrupulous government official or vendor to rort the system. Both have happened in China, although the former has been more positive!
Like the Federal Tax Credits in the US, the China subsidies start to drop off over time and has probably helped the massive increase in sales, however there were incidents where some manufacturers inflated sales figures to gain more government funding. With the subsidies now reducing, it seems that the market has stabilised and the pricing of each vehicle will not affect ongoing sales.
Some reports suggested that the EV market in China was a bubble that would burst. I’m not so sure, for a number of reasons. Firstly the market valuations of the companies are not overheating like they were in the tech market in the early 2000s. All the players have tangible and physical product unlike the tech market where there were high valuations on companies who had no real business structure or revenue streams.
Secondly, China is a global player in the automotive market and supplies batteries and other components as well as full vehicles. Chinese buyers want the latest technology and they are keen to buy local products. The market is working as it should be. Finally, I think that some of the smaller Chinese manufacturers will cut deals with US and European manufacturers to supply cars or components to allow them to compete in the their home markets providing another revenue stream.
The age of China being an automotive backwater has long gone – we need to expect more vehicles to be exported out of China and for the older manufacturing groups to be under pressure, possibly even being bought by one of the upcoming eastern challengers.