(Bloomberg) — China’s big tech firms are feeling the pain of being late to the electric vehicle party.
Their push into the world’s largest car market is being hampered by government efforts to rein in an EV industry built at breakneck pace via years of generous subsidies. But as consumer demand takes a hit and Beijing’s strict rules around production licenses endure, aspiring market entrants are being pushed into partnerships with licensed manufacturers, or pivoting their business plans entirely.
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“Technology companies need to find their own positioning in this fiercely competitive market,” said Esun Xu, senior consulting director at Frost & Sullivan. “It’s becoming harder for them to get into the game as they face multiple challenges including technological barriers, financial requirements, market competition, regulatory hurdles, and supply chain management.”
The toughest hurdle is getting a hold of the permit needed to make an EV. China has granted just a handful — including to industry newcomer Hozon New Energy Automobile Co. — since July 2017, when it tightened rules to contain overcapacity.
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Subsequent changes in 2022 required EV firms as well as the companies to which they outsource production to both possess a manufacturing license, making it even more difficult for outsiders wanting to crack into the sector.
In practice it’s altogether harder than that because the National Development and Reform Commission — one of two bodies that have to green light a manufacturing permit — has been halting approvals for deals that would involve the transfer of a permit from one company to another, according to people familiar with the matter, who asked not to be identified discussing private deliberations.
The NDRC didn’t respond to a faxed request for comment.
That’s reshaping the landscape, just as companies are looking increasingly to technology breakthroughs in areas like autonomous driving to enhance their offerings to consumers.
The tie up last month between Didi Global Inc. and EV maker Xpeng Inc. could be a sign of what lies ahead. The latter’s purchase of Didi’s smart-car development arm boosts its tech know-how and will see the two launch a new brand next year targeting the mass market.
It’s a major change for the ride-hailing giant, which was once looking to acquire stakes in traditional carmakers to get a production permit but changed its approach because the prospect of getting regulatory approval for any deal involving a permit transfer was dim, the people familiar said.
A representative for Didi didn’t respond to a request for comment. A spokesperson for Xpeng declined to comment.
Billions of dollars have poured into China’s EV sector over the past decade, from established automakers to up-and-comers alike, unleashing a wave of mergers, acquisitions and increasingly high-tech product launches. By 2019, when Tesla Inc. was delivering its first Chinese-built cars, there were about 500 registered EV makers in China.
That includes XPeng and Li Auto Inc., both of which acquired their targets’ production permits in deals approved before rules were tightened. Others like Nio Inc. chose to outsource manufacturing to state-backed Anhui Jianghuai Automobile Group, which is approved to make cars.
But the frenzy has given way to consolidation as weaker players get squeezed out by intensifying competition and stricter regulations, leaving behind a trail of bankruptcies, deserted factories and fields of abandoned cars. Now, there’s about 100 manufacturers left.
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“With competition this fierce, the scale required for EV makers to generate a profit is higher, which means years of cash burn for someone starting from scratch,” said Bloomberg Intelligence analyst Joanna Chen. “It probably makes better sense for tech firms to focus on autonomous driving, connectivity, mobility services instead of going into the capital-intensive manufacturing business.”
Jidu is an example of how rapidly companies need to adapt. The autonomous EV startup backed by tech giant Baidu Inc. and automaker Zhejiang Geely Holding Group Co. unveiled a concept version of a self-driving vehicle in June 2022 with plans for mass production in 2023.
But Jidu has since removed all posts related to the plan from its official WeChat account. In August, Geely said it has set up another brand called Jiyue, with Geely holding 65% stake and Baidu 35%. The partnership will launch an EV model under the new brand ‘JI YUE,’ with deliveries slated to start in the fourth quarter.
A Jiyue spokesperson said that Baidu and Geely’s strategic partnership to make robot cars has two components, with Jidu carrying out research and development and Jiyue manufacturing vehicles. The spokesperson said that Jidu hasn’t folded and that new content will be published on its WeChat account based on its adjusted function.
Others are still trying to keep their EV dreams afloat.
Jiangsu Niutron New Energy Technology Co. is attempting to make a come back via a partnership with Dorcen Auto. Founded in 2018 by former Huawei Technologies Co. Vice President Li Yinan, Niutron shut down last year and returned deposits to customers without delivering a single car because it was struggling to obtain its permit, a person familiar with the situation said.
In recent months, the Ministry of Industry and Information Technology approved the pair’s new model of EV, clearing the way for production.
Tencent Holdings Ltd.-backed Rox Motor, meanwhile, is working with Beijing Automobile Works Co. to manufacture a SUV model under a new brand Jishi 01. Rox Motor also counts IDG Capital and Coatue as backers and was valued at about $2 billion in its latest funding round closed in early 2022, another person said.
Beyond the regulatory restrictions, Beijing’s shift away from propping up carmakers is making the sector even more cut-throat. At the other end of the spectrum, it’s helping heavyweights like local giant BYD Co. and Tesla Inc. strengthen their already dominant positions.
With its deep pockets, smart-phone giant Xiaomi Corp., which has promised to make its own cars by 2024, looms as the next test for the industry.
The company, which in 2021 pledged to invest about $10 billion over 10 years to make EVs, won approval from China’s NDRC to make EVs in August, but it’s still waiting on clearance from MIIT, Reuters reported last month, citing people it didn’t identify. The firm may still need to work with Beijing Automotive Group Co. to roll out its production, Bloomberg News reported in August last year.
Xiaomi might need to show that its tie up with Beijing Auto is selling vehicles in order for regulators to fully clear the way for the tech firm to make its own cars, according to people familiar with the matter. Xiaomi is building its own EV factory in Beijing and has told investors the first cars are slated to be made early next year.
A representative for Xiaomi didn’t respond to a request for comment. The MIIT didn’t respond to a fax seeking comment.
Still, there are skeptics.
“First-mover advantages are fading fast as most legacy automakers have stepped up their EV rollouts, so there’s even lower chance to success for latecomers,” said BI’s Chen.
–With assistance from Linda Lew, Sarah Zheng, Gao Yuan and Chunying Zhang.
©2023 Bloomberg L.P.