China’s electric vehicle market has witnessed a sharp consolidation trend over the past several years, winnowing the initial surge of new players that emerged when China first rolled out plans to support cleaner energy vehicles with state subsidies and other incentives. The market was once over-crowded, but it has now transitioned to being moderately concentrated. The winners are the players already at the top of the market, such as BYD and Tesla, which have been consolidating their power. According to auto analyst Wang Hanyang from 86Research Ltd., 80% of the new energy vehicle startups, if we count all of them since the initial subsidies, have exited or are exiting the market.
This news is not good for smaller players such as Nio, whose sales have been tumbling, and other struggling startups trying to take on established players like BYD and Tesla. The Herfindahl-Hirschman Index, a metric used by academics and regulators to evaluate competition and measure market concentration, shows a clear consolidation trend, with dominant players strengthening their positions and smaller firms struggling to survive. The market share by unit sales for the top four players rose to 60% in the first quarter of 2023, compared to 44% the same period three years ago.
While China extended a tax break for consumers buying new energy vehicles through 2027, all signs are that the government won’t continue to prop up troubled carmakers. Market forces and regulatory mechanisms will help make the surviving brands internationally competitive, says Xin Guobin, an official from the Ministry of Industry and Information Technology.
BYD, backed by Warren Buffett’s Berkshire Hathaway Inc., appears to have the strongest position in the market. More than one-in-three NEVs sold in China today are from the Shenzhen-based company, up from less than 15% in late 2020 when the clean-car market first started steadily selling more than 100,000 units every month. Its success is squeezing even market leader Tesla, which gradually lost share for the past two years until a breakthrough in the first quarter of 2023.
Many early electric vehicles were built mainly to qualify for subsidies and meet regulatory requirements, and often didn’t offer high-quality design and performance. Demand for those vehicles started to fade once requirements increased, competitors emerged, and the fleet market became saturated. Zhidou Electric Vehicles Co., a Ninghai-based manufacturer once backed by Li Shufu’s Zhejiang Geely Holding Group, sold a total of about 100,000 vehicles with a driving range of as little as 62 miles (100 kilometers) per charge between 2015 and 2017, but it quickly lost momentum after China ended subsidies for EVs that traveled less than 93 miles between charges in 2018.
The market is by no means easy for carmakers trying to lure customers rather than meet regulatory rules. One of the most recent casualties in the slow-motion shakeout was WM Motor Technology Group Co., the Shanghai-based electric-car maker backed by tech giant Baidu Inc., which has seen sales plummet. The once-highly lauded company landed two of the top five venture capital investments by deal size in the clean car market in China since 2018. Investors in the transactions ranged from leading state-owned banks to tech firms.
Whether the pace of market consolidation will continue amid still nascent consumer interest in electric cars is difficult to say. Retail sales of new-energy vehicles jumped to 580,000 units in China last month but accounted for only one-third of the total deliveries of passenger cars, data from the Passenger Car Association show. Car consulting firm JSC Automotive predicts that cool features like autonomous driving functions, large built-in screens and even karaoke systems found in the initial wave of EVs will give way to a focus on safety, performance, and durability, a shift that may offer legacy automakers like Volkswagen AG an advantage.
