What's behind China's EV frenzy?



Chinese smartphone giant Xiaomi announced plans to launch an electric car business with $10 billion investment, March 30, 2020. /CFP

After denying plans to develop electric vehicles (EVs) months ago, China's major smartphone maker Xiaomi has announced it will join the frenzy. It is not the first Chinese non-auto company to eye the EV sector and will not be the last.

Three major groups of new players

Compared with other countries, consumers in China have plenty of choices when they consider buying an EV.

China has 101 EV brands, each of which sold more than 1,000 cars in 2020. Only 40 brands in the U.S. met that sales number, along with 39 in Germany and 26 in Japan, according to data from McKinsey.

There are three major groups of EV makers in China: traditional gasoline automakers who develop EVs to enrich their product portfolios, such as BYD; new brands founded only on EVs, for instance Nio; and companies in non-auto fields that have set up EV divisions, including Xiaomi and real estate developer Evergrande.

Rather than developing e-cars directly, some non-auto companies choose to expand into the industrial chain. In March, Chinese home appliance maker Midea acquired Hiconics, a company that produces EV parts and charging facilities.

In China, there have been more than 200,000 enterprises with registered businesses related to new energy vehicles, including EVs and hybrid cars, according to the corporate data platform Tianyancha.

Why do these enterprises all want a bite of e-mobility?

The first reason may be the market is simply too big to miss. Though China has been the world's largest auto market for a decade, the country's companies have also been leading the transformation into e-mobility.

Even under the shadow of the pandemic, the EV market is much more likely to recover and China and Europe are expected to see stronger growth than the U.S., according to a report on electric mobility after the crisis published by McKinsey.

Source: McKinsey

China is by far the largest new energy vehicles market in the world, with 1.3 million new energy vehicles sold in 2020, according to data from China's Ministry of Industry and Information Technology. McKinsey research indicated that the country's economic rebound had contributed to a robust, developing EV system.

The second driving force for new players, and also a major reason for the booming market in China, is the government policies designed to support EV growth.

With a strong target set for emission reductions, the Chinese government has attempted to stimulate EV sales by extending purchase subsidies. Although the subsidies policies are due to expire through 2022, the government has exempted EVs from the purchase tax.

However, compared with a smartphone or a laptop, an automobile is a more complex and technologically sophisticated product closely related to life safety. It is also a consumer durable that people are more careful about when making their purchase decision.

Auto manufacturing also has a higher threshold in capital, technology, supply chains and talents.

Even enterprises that have succeeded in other fields with resources have suffered failures in their EV endeavors.

In 2019, Dyson, the home appliances maker best known for its vacuum cleaners, scrapped its EV plan announced in 2017. After investing 500 million pounds ($685.42 million) in developing a model, the company admitted it was not "commercially viable."

Many Chinese players have been caught in a similar situation, including China's air conditioner maker Gree and Faraday Future, an EV sports car brand founded by the Leshi internet founder, who has since gone bankrupt.

Both Gree and Faraday Future failed to put their models on the road after burning cash for years.

With Tesla's success and others' failure in China's crowded market, Xiaomi seems prepared for a hard fight.

As of the end of 2020, Xiaomi had 108 billion yuan ($16.48 billion) in cash, Lei Jun, founder and chief executive of the company, said at the press conference when announcing the EV plan.

"For EV development, we can afford the loss."