China sets out to rein in country’s bloated EV industry

China has unveiled plans to consolidate the country’s electric vehicle (EV) industry, which Beijing believes is unable to evolve as it has far too many players.

“Looking forward, EV companies should grow bigger and stronger. We have too many EV firms on the market right now. The firms are mostly small and scattered,” Xiao Yaqing, China’s minister for industry and information technology, said at a press conference in Beijing, adding that authorities see merging and restructuring as ways to propel the industry to success.

“The role of the market should be fully utilized and we encourage merger and restructuring efforts in the EV sector to further increase market concentration,” the official stated.

A number of Chinese EV producers traded in red following the news, with Xpeng Inc. losing 2.3% in Hong Kong trading, and Li Auto Inc. dropping 1.4%. In mainland China, BYD Co. fell 1.8% and BAIC BluePark New Energy Technology Co. plunged even deeper, shedding 4.6%.

China’s electric car industry is one of the world’s biggest, with about 300 carmakers, which the government considers an overcapacity. Also, according to CNBC, the number of new Chinese businesses related to “new energy vehicles” jumped by a fourth in 2021, bringing the total to some 321,000. This is the result of Beijing’s own actions, as it increasingly subsidized the industry amid the agenda of turning to cleaner energy sources in the automotive sector to cut pollution.

Total government subsidies for new energy vehicle purchases amounted to 33 billion yuan ($5.1 billion) from 2015 to 2020, data from the Ministry for Industry and Information Technology shows.

Now, however, Beijing is drafting measures to rein in the bloated industry, considering options like setting a minimum production capacity utilization rate, Bloomberg reported, citing sources familiar with the matter. Last year the average production capacity utilization rate for automakers in China was little short of 53%, according to the National Development and Reform Commission.

“This has been a liability for the local players since the beginning: too many companies dividing the market, which fragments the supply chains for the core components. It’s imperative to concentrate on a few key manufacturers and suppliers of the ingredients of an EV,” Bill Russo, founder and CEO of Shanghai-based advisory firm Automobility Ltd, told the news outlet.Tu Le, founder of Beijing-based advisory firm Sino Auto Insights, says the government’s current move is just another way “to trim the [number] of [EV market] entrants.”

“They likely [saw] a buildup of overcapacity [and] too many brands that won’t be able to compete in the market with products. This has happened often in the Chinese market across sectors and leads to a race to the bottom where companies compete solely on price. It stresses the entire sector,” the expert stated, as cited by CNBC.

He also noted that China’s major EV business players – Nio, Xpeng Li Auto and BYD – may benefit from consolidation practices if they come to pass, “since it will eliminate potential competitors and perhaps allow them to acquire a team or technology to enhance their products.”

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