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Behind the trillion RMB investment and 20 million capacity in NEVs

– by Liu Xiaolin, Gao Feichang, Jiang Jingyi, Wan Xuefei, Hu Wenwen, Li Yueting and Wang Xiaoyan

Wuhan is unhappy that Chengdu had a higher GDP in 2016 and Dongfeng-Peugeot-Citroën Automobile Co., Ltd. chose to invest in another plant in the capital of Sichuan Province. It implies a crucial role the auto industry plays in local economic development.

Although China has set a target to produce and sell two million new energy vehicles (NEV) in 2020, actual capacity is 10 times larger. Beginning from 2015, more than 200 NEV programs have been announced, with more than ¥1 trillion in investments and projected annual output capacity of 21.24 million units. More than 50 such programs were announced in the first half of 2017.

Moreover, the stellar growth in NEVs introduces sweeping change to China’s auto industry. All provinces have implemented their plans to develop NEVs, and 20 of them already constructed NEV industrial parks. In the past three decades, three regions dominate China’s car production: the Northeast, the Yangtze River Delta and the Pearl River Delta. Now they are gradually losing their predominance, as even the little-known towns including Foshan and Ganzhou are emerging as competitive cities to produce cars.

Meanwhile, more social capital and small technology enterprises have joined the pool of investment, although Baidu, Alibaba and Tencent (BAT) are still the magnates whose actions can exert powerful influence on the industry.

The more profound change is that the capital is gaining a stronger hold on the car industry, as the NEV lowers the technical threshold and reduces entry barriers. Compared to gasoline cars, NEVs don’t have complex mechanical systems like engines and transmissions. They are much easier to engineer and manufacture.

The industry is embracing unprecedented freedom.

 

New landscape

Nanjing Automobile Corp. was taken over by SAIC Motor Corp. 10 years ago. It has always been a shame for Nanjingers, but the rising NEV industry gives them a chance to re-prosper.

Since 2015, more than 10 NEV programs have been launched in Nanjing. Also, the prototype of industrial layout in Lishui District is quite inspiring. Dong Mingzhu, CEO of home appliance giant Gree Electronics, devoted ¥10 billion to construct the Yinlong Nanjing base there. The first-phase project will be built for production of electric commercial vehicles and power batteries.

Nanjing is not the only fortune-maker who benefits from NEVs. Even remote and under-industrialized areas like Inner Mongolia, Tibet, Xinjiang and Ningxia now secure investment for their own NEV projects. Currently, there are more than 200 registered NEV companies.

Zhejiang, which has only one mainstream automaker – Geely, has become the core of NEV manufacturing. Since 2015, the NEV industry in Zhejiang has received ¥120 billion in funding, with total annual output capacity of 2.47 million units. Experts appreciate Zhejiang’s performance in NEV business, contrasting its awkward position in the traditional car industry: with abundant capital and human resources, its development was unsatisfying and lacked further momentum. 

With the rise of Nanjing, Jiangsu Province has the second largest NEV investment of ¥104.88 billion. Twelve cities in Jiangsu are intensively building NEV factories.

Hubei, having gained its fame in the traditional car industry, ranks third in terms of NEV investment, and has the largest capacity of 2.68 million units. Guangdong, Jiangxi and Anhui follow, ranking from fourth to sixth in terms of investment scale.

The NEV industrial parks are being constructed at a higher speed in central and western regions, according to China’s National Development and Reform Commission (NDRC).

But with more mature infrastructure and existing industrial chains, the Yangtze River Delta and the Pearl River Delta are still most attractive areas to investors. However there are subtle changes: the investment spreads over a wider area: three cities in Guangdong – Foshan, Zhuhai and Zhongshan – are competing for NEV investment.

New brands of NEV are springing at a dazzling speed, and there is no lack of business magnates among the investors, including Gree and Wuliangye (a Chinese liquor maker). The NEV has become a real concern for the industry.

 

Role of local governments and social capital

On June 25, the local government of Xiaogan, Hubei Province issued four policies to attract investment. One of them concerns the NEV business: The enterprises registered in Xiaogan and being catalogued in the national vehicle model recommendation list can receive a ¥50 million bonus. The supporting measures include government subsidies for manufacturing equipment purchase, intermediary services and freeing administrative charges for five years.

Wuhan is dreaming of becoming “Detroit of China,” and Xiaogan proves to be its eager partner who desperately grabs every chance of automotive investment. However, Xiaogan’s financial deficit is holding its ambitions back: the public budget revenue was ¥12.92 billion in 2016, while the expenditure was ¥35.51 billion.

Xiaogan is not the only city which unabashedly demonstrates its eagerness for NEV development. In the past three years, almost all provinces have launched new policies and subsidies concerning NEVs.

Different from those in the traditional car industry, NEV projects are open to social capital. The cooperation between industrial fund and local government subsidy is the mainstream investment model. In April 2016, Zhongjin Guotai Holding Group, Tianjin Binhai Hi-Tech Industry Development Area and GSR Ventures jointly set up a ¥10 billion fund for NEV investment. In December, Bojun NEV Project signed a cooperative contract with Pukou Economic Development Zone, obtaining the ¥10 billion in funding.

The trend continued in 2017. In March 2017, BAIC Capital, the investment arm of BAIC Group, initiated the Anpeng NEV Industry Development Fund. It is the first investment fund for NEVs with a ¥10 billion scale to be readied for market operations.

Xu Heyi, chairman of BAIC Group, said that NEVs involve a kind of system engineering that combines people, vehicles, roads, the environment and energy. “The market size is expected to reach ¥10 trillion in the future,” he said.

Other local governments also actively partake in the NEV investment craze, illustrating China’s “gold rush” into battery electric vehicles. Singulato, a Chinese smart EV startup, raised $600 million in a second-round financing, 40 percent of which came from the local government in Tongling, Anhui Province. “We believe this effort will definitely allow Tongling to accelerate the city’s industrial transformation,” Tongling Mayor Ni Duping said in a statement.

However, the enthusiasm about investment far exceeds that of consumption, and the supply far surpasses demand. It is also noteworthy that NDRC has issued 15 NEV manufacturing permits, and reports suggest authorities will not continue to issue them. The rest who are still applying are waiting for further reviews by relevant governmental authorities.

Under such circumstances, the cooperation between local governments and social capital is more like a gamble, with risks and uncertainties ahead. Capital, policy and technology all affect the outcome of NEV investment. For startups, their risk lies in the banks’ tightening lending policy. For governments, if the demand for NEVs remains low, their subsidies are less likely to be refunded.

 

Golden Age ends in two years?

The NEV gold rush reminds us of the craze for gasoline car investment 10 years ago. Due to blind investment and poor management, many traditional automobile factories are now abandoned and many enterprises went bust. 

In 2010, a traditional car project with an investment of ¥1.8 billion failed, rendering thousands of acres of land left unused. In 2016, the land acquired by Xiuwu Automotive Spare Parts Corp. was put up for auction. The abandoned factories were such a humiliation to those blind investors.

Some practitioners are still cautious about the NEV craze, naming it as a siren song, whose allure is masking its risks. However, many experts are quite optimistic about the NEVs future. “The overcapacity generated at the initial stage is quite normal,” said Xu Changming, a deputy director with the State Information Center. “Oversupply stimulates competition, which is good news for quality improvement and technology development.”

He believes that every industry prospers by attracting a large number of practitioners, and that’s a common rule. “Then market will always lead to the survival of the fittest, and only well-performing companies will survive,” he commented.

He also pointed out that the suspension of issuing permits may imply that the government wants to put NEV industry into a larger frame, plotting more detailed development strategy.

Wang Ming, partner of an automotive funding company, agrees that the risks of NEV investment shouldn’t be over-emphasized. “The market will soon wipe out incompetent NEV companies. The golden age will end in two years,” he said. Currently, the NEV projects are open to social capital, but it’s hard to predict whether this policy could sustain.

But Xu thinks there will be a longer period of time for new players. “It’s too early to predict ‘the end of NEV golden age,’ everything has just started,” said Xu.

(Rewritten by Shi Shengyuan based on authors’ article on Economic Observer and reports from Financial Times and Reuters)

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