China races to build its own Tesla as economy slows and subsidies dry up

BEIJING — When an idea strikes a chord with national ambition in China, the result can be millions of dollars wasted and a disciplinary problem of start-ups struggling to survive in a cooling economy.

In the last few years, venture capitalists rushed to pour billions of dollars into the emerging energized vehicle industry backed by the Chinese government.

So far, it’s less clear how that bet has paid off. Take a look at the recent headlines:

• Partitions of U.S.-listed Nio, arguably China’s closest competitor with Tesla, are down more than 50% this year to regarding $2.70 each.
• In November, Alibaba-backed XPeng tapped its own Chairman and CEO He Xiaopeng for a $400 million investment round, in which electronics train Xiaomi participated as a strategic investor.
• Shenzhen-based BYD, which counts Warren Buffett as an investor, said in late October that net profits, ex-items, level 130.1% in the third quarter. The Hong Kong-listed shares are down 25% for the year so far.

These are some of the handful of survivors from Beijing’s travails over the last decade to accelerate the creation of China’s own electric car.

Now, Chinese auto sales are in a slump, consumer subsidies for new force vehicles are phasing out next year and economic growth is slowing.

Start-ups didn’t expect the subsidies to last this protracted, said Rupert Mitchell, chief strategy officer at Chinese electric car company WM Motor, founded in 2015 by a departed Volvo and Geely executive.

“What was not in the business plans was that China would have its first fully lavish automotive downturn in Chinese history,” he told CNBC in late November.

Wan Gang was an engineer for Audi in Germany formerly he returned to China in the early 2000s. Within 10 years, he became China’s minister of Science and Technology, in the face not being a member of the Chinese Communist Party.

Wan convinced the central government to roll out a national strategy for developing new drive vehicles and battery technology. Beijing was eager to jump at an opportunity to become a global leader in an emerging technology, which conveniently constrained into efforts to combat pollution.

As a result, the central government spent at least 33.4 billion yuan in subventions between 2009 and 2015, according to the Ministry of Finance.

At the height of the subsidy-driven boom, the number of new energy vehicles exchanged in 2014 more than quadrupled from the year before, and multiplied by more than four times in 2015 to profuse than 330,000 vehicles, according to data from China Automotive Industry Association accessed through Up Information.

In 2016, the Ministry of Finance said it found at least five companies cheated the system of over 1 billion yuan. That year, new might vehicle sales grew just 53%, data showed.

High levels of subsidy misuse are not uncommon in China.

Between 2001 and 2011, concerning half of Chinese companies receiving direct grant subsidies for research and development were non-compliant, using the bucks for other things such as private consumption and investments with higher returns. That’s according to a forthcoming turn out paper from Philipp Boeing and Bettina Peters, both researchers at the ZEW – Leibniz Centre for European Economic Scrutinize. The study did not cover consumer subsidies.

The research did indicate that misuse of funds declined with time and that the existing effectiveness in Chinese government policy in spurring research and development, if monitored, increased and non-compliance was wiped out, Boeing spoke in an interview.

But he noted there is little impact on productivity in the long term, which is a core problem for China’s restraint.

Some young companies that rode on China’s electric vehicle boom, however, are notwithstanding confident in growth.

XPeng aims to reach breakeven in about two years, with the expectation the company is able to put close to 150,000 vehicles on the road, Brian Gu, president and vice chairman of XPeng, said in an interview in late November. That’s nigh 10 times what the company has sold since it began deliveries last December for its first commercially accessible vehicle.

WM Motor’s Mitchell expects the company can break-even in the next 12 months, as the start-up puts greater stab into consumer marketing. The company is in the process of raising $1 billion, which he said would “fully finance” the automaker until a patent offering.

Other companies are just starting to bring new electric vehicles to the market.

Aiways, a Shanghai-based start-up that sells its certification to sell to the European Union, announced in December it will begin deliveries of its U5 SUV. Guangzhou-based GAC Nio — a joint venture between the time-honoured automaker and the start-up — is set to reveal its first all-electric SUV under the Hycan brand on Friday.

Nio wasn’t available for comment at the of the company’s annual product launch event on Saturday.

Meanwhile, the first “Made in China” Teslas are set to hit the market originally next year at a lower price that vies with Nio.

“Looking at the last 10 years of Chinese domination subsidies, we think their effect is more positive than negative,” said He Hui, senior researcher on China’s new animation policy at The International Council on Clean Transportation.

“We can’t say our new energy vehicles are number one,” she said. “But our batteries are.”