China's electric car revolution is eating itself
In the world's biggest market for electric cars, a sales miracle is turning into a 'Darwinian battle' for survival.
The number of electric vehicles (EVs) sold in China rocketed to 6.4m last year, accounting for more than half of all cars sold.
Despite this roaring past success, growth is now slowing and the market has become hugely over-saturated with companies fighting to win over drivers. It has prompted a vicious price war that has caused alarm in Beijing.
Last week, the government issued a stern warning to 16 brands including BYD, Nio, Leapmotor and SAIC Motor, which are among the country's biggest domestic brands, urging them not to destroy each other by merciless undercutting on price.
Analysts believe competition is only set to become more intense, with a potentially significant impact on export markets such as the UK and Europe. It will also have consequences for Western brands such as Tesla, which are also fighting for sales in China.
'There's been a Darwinian battle, where the larger manufacturers in China are heavily discounting, and really pushing prices downwards in a brutal fashion,' says Matthias Schmidt, an independent automotive analyst.
'They're looking to destroy their domestic peers and also Western manufacturers, trying to get them to exit the Chinese market.'
While the clash may be good for Chinese drivers, who benefit from cheaper cars, it is bad news for Britain. Chinese brands are charging higher prices abroad, using international sales to bank-roll price cuts at home.
The battle royale is the culmination of a years-long EV boom in the country, kicked off under Beijing's 'Made in China' strategy.
Recognising the fact that Chinese manufacturers were unlikely to overtake Western rivals that made traditional internal combustion engine (ICE) cars, Beijing prioritised support for future hybrid and electric models – known collectively as 'new energy vehicles'.
Since then, hundreds of EV brands have emerged off the back of surging consumer demand and massive state support, including subsidies, state-backed loans, investments from local governments and huge spending on charging infrastructure.
Growth has been explosive, helping China become the world's largest manufacturer of EVs by far and more recently the largest exporter of cars globally.
In 2015, about 100,000 EVs were sold in the country. By 2020 the figure had jumped to about 900,000, rising to 2.7m, 4.4m, 5.4m and 6.4m in the following four years.
But the rapid annual growth has slowed from 63pc to just 19pc in the past two years. That has put intense pressure on companies, many of which had built business models contingent on strong sales growth.
'There are far more EV companies in China than can possibly survive in a competitive market,' the International Energy Agency (IEA) has warned. It highlighted that one company alone, Nio, recorded net losses of $3bn (£2.2bn) in 2023.
Consultants at AlixPartners have estimated that the number of EV brands will plummet from more than 130 last year to just 19 profitable companies by the end of this decade.
The market is already experiencing what analysts have euphemistically called 'consolidation', with the losers forced to declare bankruptcy or pursue mergers with their rivals.
To keep the sales coming in, many are resorting to aggressive discounting. But that has prompted concerns in Beijing, as companies have tended to fund this by squeezing their suppliers, paying them later and later. That threatens to have knock-on effects if those companies can't then pay their own workers and bills.
Some companies are taking more than 200 days – 28 weeks – to pay suppliers, including XPeng and Dongfeng Motor, according to the Financial Times.
Beijing has sought to counter this by imposing new rules that require brands to pay up in 60 days, but there are doubts about whether these rules will be followed and concerns that it may plunge some car companies into deeper trouble.
'We are entering the consolidation phase, and the way producers in China are trying to survive is by price war,' says Endeavour Tian, an automotive analyst at Rhodium Group.
The discounting is often led by BYD, the biggest-selling EV brand in China. That is partly because it has more on the line. BYD owns much of its supply chain, a model that requires huge amounts of capital.
This means the company is relying on high sales volumes to keep the wheels turning.
'If their revenue is not that high, then there will be problems,' says Tian.
The fierce competition in China has dragged on for longer than expected as several brands are backed by local governments reluctant to let them collapse.
'The government either invests in them or provides subsidies to them or provides low interest credit, so that even when some of the producers are really at the brink of bankruptcy they're still saved - and the price war goes on,' Tian says.
For example, in 2020 Nio was rescued from collapse through a $1bn (£750m) bailout by state-owned investors.
Elsewhere, Dongfeng Motor and Changan Auto – both owned by the central government – are in talks to merge amid the huge market pressures.
Among the chaos, Chinese drivers are ostensibly benefitting from cheaper cars. But the price wars are not necessarily good for consumers abroad. In fact, for the UK and Europe, the pressure in China could mean higher prices for longer.
Already, the sticker prices of Chinese-made cars tend to be far higher when exported.
For example, BYD's best-selling Seagull hatchback starts at 56,800 yuan, or about £5,900, for local buyers. But in the UK, where the car launched this year, the model (renamed the Dolphin Surf) sells for £18,650.
Similarly, research by Rhodium last year found that BYD's Seal U sold in Europe for a premium of about £11,000 compared to China.
'Those sales in Europe are essentially subsidising the price war taking place in the China market,' Schmidt says.
This is particularly the case in Britain, which has not copied EU tariffs on Chinese EVs. In May, Chinese brands accounted for almost one in 10 cars sold in the UK according to the Society for Motor Manufacturers and Traders.
'The UK is essentially a cash cow market for Chinese manufacturers, it's extremely profitable,' says Schmidt. 'That's the reason we're seeing the UK soak up the highest amount of Chinese cars.'
The largest European destinations for Chinese EVs are the UK, Spain and Italy, which make up more than 60pc of sales combined, according to Schmidt.
The price war at home means that – at least for now – fears of cheap Chinese cars flooding into Europe may be overdone. Instead, brands may want to protect their margins, says Rhodium's Tian.
At the same time, while European manufacturers are finding it hard to compete in China, in Europe they are starting to catch up.
Greater adoption of lower-cost lithium iron phosphate (LFP) batteries, which have long been used by Chinese brands, have allowed Western manufacturers to bring prices down on a spate of newer models, says Schmidt.
The share of EVs sold with LFP batteries in Europe has increased from 3pc to 10pc in just two years, according to the International Energy Agency.
Yet Western rivals shouldn't take too much comfort from this.
Ultimately, Chinese brands such as BYD are more focused on growth than profits – and they still have plenty of room to cut prices.
And once the Darwinian battle at home is over, the newly-crowned winners may decide to bring the price wars to Europe next.
'If they want to play out the same scenario in overseas markets, that's also doable,' Tian says.
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