It is dark days for China’s auto industry: New automobile purchases have declined for the past 13 months, while new energy vehicle (NEV) sales fell in July for the first time in two years as Beijing moves to cut subsidies.
China has been the world’s largest electric vehicle (EV) market since 2015 and is also home to around 500 EV startups as municipal governments seek out local EV success stories. However, the demands of delivering to the market—manufacturing, supply chain, retail channels, customers, and safety—is a challenge for startups and only a few companies can survive, Zhang Li, partner of Cathay Capital, said Thursday at the TechNode Tech After Hours Series event in Shanghai.
Young EV makers have been struggling to stay afloat in a shrinking capital market and economic slowdown. Nio, a Chinese EV frontrunner, on Thursday announced it will cut another 1,200 jobs by the end of September. “Everyone should get ready for more challenges and setbacks coming ahead,” (our translation) wrote Nio CEO William Li in an internal memo.
The once-promising Tesla challenger has downsized amid massive recalls and huge losses over the past several months. Still, it is one of the few Chinese EV makers that has actually delivered cars to customers, setting it apart from most of the industry, where many others are on the verge of bankruptcy. So far, only six Chinese EV startups have delivered cars to customers, while more than 50 startups have raised north of $18 billion in total since 2014, according to business consultancy AlixPartner.
“It’s such a capital intensive sector, and only those who are able to pour cash while still innovating products and understanding customers could win at the end,” said Tu T. Le, managing director of Sino Auto Insights.
Rupert Mitchell, the chief strategy officer for WM Motor, said that he would be surprised if more than half a dozen names are still in the game by year-end.
WM Motor is the top seller among all the new EV makers in the first half of this year with more than 8,500 models delivered. One of the key lessons for the nascent Chinese EV industry over the last few years is the lack of focus on the essential goal as a carmaker: get the factory open, start making cars, and get them on the road, according to Mitchell.
Venture capital raised by EV makers in 2019 has plummeted compared with a year ago, forcing new EV makers to be more focused than ever. After suffering a loss of more than RMB 20 billion since founding, Nio, known for its expensive retail and club services, is shifting from lavish and diverse business strategies to a more focused commitment on core business execution.
The carmaker recently scaled back an ambitious goal of building 1,100 battery swapping facilities by next year, and may spin off its recharging service Nio Power in order to seek external financing.
“It’s a smart decision [for Nio]. Infrastructure also involves government, and many subsidies are now switched to the charging infrastructure,” said Zhang.
After a decade of subsidized consumer purchases, Chinese EV makers have to compete head to head with internal combustion engine (ICE) carmakers as subsidies are expected to be halted completely in 2020, according to a government plan. Automakers now need to take a step back and re-focus on customer and product, said Le.
However, why should a customer buy an EV, when a gasoline car still has more performance advantages for long distance trips? How are they competing with bigger OEMs for customers? Mitchell believes for tech-enabled Chinese consumers, it is more about focus on user experience within the cockpit.
“The more interesting shift is the connected vehicle. Beyond the simply electrified powertrain, you’ve got an operating system that could order your white cappuccino automatically as you are 10 minutes away from your office,” said Mitchell.
Zhang agreed. “It’s no longer just a transportation from one position to another. The car is kind of a small room where you interact with others. You don’t want to be disconnected,” she said.
With a new generation of young customers comes a new set of needs, yet traditional automakers are still more focused on product rather than customer. “That is the gap,” Zhang said, adding that the next growth opportunity will come from young Chinese automakers.
“If your use case is moving slowly in urban traffic, you are really not worrying about top speed. The focus will be the comfort. Infotainment and air purification are more important to you,” said Mitchell. Although customers now expect to receive onboard services for free, looking ahead, the former Goldman Sachs investment banker expects consumers could be paying a premium for “that software upgrade experience, which is 100% gross margin” for carmakers.
“It’s those within the cockpit experiences that are going to be key differentiators,” Mitchell said.
If you can’t see the YouTube player above, try watching here instead.