Why China’s EV start-ups can now breathe a little easier

Beijing’s bold stimulus measures may have come just in time to save the Chinese electric vehicle (EV) start-ups that have been running on a knife-edge.

The higher tariffs imposed by the United States and European Union are just bumps in the road for market leaders like BYD and Geely, which have solid financials and are already making inroads in overseas markets. But for innovative start-ups with dreams of becoming China’s answer to Tesla, this is a make-or-break moment.

Their biggest problem is running out of cash. Competing in China’s cutthroat auto market is expensive. Electric carmakers have to fight for a share of a crowded marketplace, and fickle consumer preferences keep them on their toes. High research and development costs, aggressive spending on sales and marketing, and intense price competition have been major obstacles to sustainable profits.

A fortuitous combination of circumstances came together to allow China to dramatically scale up production of EVs over the past decade. Strong government support, rapid technological innovation and entrepreneurial drive all played a role in creating the industry’s sophisticated ecosystem and advanced manufacturing capacity.

But the ready availability of market-based financing was a decisive factor driving China’s EV boom. Since the 2010s, Beijing has embarked on a sustained effort to transition away from internal combustion engine vehicles. Consumers were enticed by incentives that subsidised purchases of electric cars and made it easier to register them.

To investors, China’s EV sector looked like a sure bet. Companies throughout the supply chain were able to tap deep pools of funding from capital markets, sovereign wealth funds and venture capital firms, both in China and from overseas. Start-ups in the sector raised billions from investors eager to finance potential unicorns in innovative, environmentally friendly industries.

  

​Read More