China’s traditional car companies are getting electric vehicles right

Last in, first out — Niutron and Evergrande

Over the last few days, two new entrants in China’s electric vehicle (EV) industry imploded, illustrating how challenging the sector has become:

Niutron bomb

On October 5, Niutron 自游家, an EV brand launched by Liǔ Yīnán 李一男, founder of the Nasdaq-listed Chinese e-scooter brand Niu Technologies 小牛电动, announced the opening of 44 stores across China and the launch of the brand’s first model, the Niutron NV, a midsize electric SUV. By December 8, however, it was all over: Niutron announced that the 24,376 customers who had put down a deposit of 1,000 yuan ($143) for the Niutron NV will be refunded with a small-scale model of the vehicle and a $200 Starbucks voucher.

Li Yinan has had a colorful life. As a child, he was considered a prodigy and was enrolled at the Huazhong University of Science and Technology in Wuhan, Hubei Province, when barely a teenager. At the age of 27, he became chief engineer and vice president of telecom giant Huawei 华为. After three years, he left Huawei, launched several companies, and also worked at times for Baidu 百度集团 and China Mobile 中国移动. In 2014, Li founded his most successful venture: the e-scooter brand Niu Technologies 小牛电动. But he was unable to enjoy much of Niu Technology’s success, as in 2015, he was sentenced to two years and six months in prison for insider trading.

Li got out of the slammer at the end of 2017, and was determined to pursue his goal of making EVs. He founded Niutron in 2018, but as Niutron held no manufacturing licenses, it had to find a production partner. Yet this was four years after NIO 蔚来汽车, XPeng 小鹏汽车, and Li Auto 理想汽车 (collectively referred to as the “Wei Xiao Li” EV brands) had already been established, and other companies like Huawei had already taken their pick of the best EV manufacturers. So in 2020, Niutron ended up with Dorcen 大乘汽车, a company based in Jiangxi Province that had only been founded in 2018, and had already been forced to stop production once in 2020 due to failure to meet emissions standards. By December 2022, Dorcen was in debt and had stopped production altogether. As a result, the Niutron NV SUV had to be canceled as it simply could not be manufactured. In addition, the small number of Niutron SUVs that had been delivered had quality problems, and lacked what are considered key components of new EVs, like Light Detection and Ranging (LiDAR) remote sensing technology.

A failed pivot from real estate

The other implosion this year was at Evergrande New Energy Auto 恒大新能源汽车, an electric car company that was launched in 2019 by the heavily indebted property developer China Evergrande Group 中国恒大.

At the end of October, Evergrande New Energy Auto held a ceremony to hand over the keys to the first five owners of its Héngchí 恒驰 brand of SUVs. The company reportedly produced 100 Hengchi 5 SUVs in October, and planned to mass-produce the vehicle in 2023. But at the end of November, reports appeared in the media that Evergrande New Energy Auto was laying off staff. On December 1, one of the company’s employees reported that he was unable to gain access to the company’s facility in Tianjin via the facial recognition system at the gate. He soon found out that he and his colleagues had indeed all been laid off without any prior notice.

China Evergrande Group sunk many billions into its abortive EV venture, including 50 billion yuan ($7.18 billion) in the first half of 2021 alone. Evergrande New Energy Auto was paying vast amounts to around 200 suppliers at home and abroad to procure the around 10,000 components that go into each EV. Nonetheless, the flagship Hengchi 5 SUV had numerous quality problems, like faulty control screens, abnormal brake noises, and defective batteries. At a time when EV production lines at companies like Great Wall Motor 长城汽车 and BYD Auto 比亚迪汽车 were in operation for 24 hours a day, staff at Evergrande New Energy Auto reported that they seldom worked overtime, and enjoyed three free meals a day. As of this writing, Evergrande New Energy Auto has reportedly been sold off for 360 million yuan ($51.73 million), although no official announcement has been made.

Back to the future — the old players are in the game

China’s new EV brands are desperate for new financing in the primary and secondary markets: Some new brands like Weltmeister 威马汽车 have failed to list on stock exchanges, while others that have done so like Leapmotor 浙江零跑科技 had decidedly lackluster initial public offerings (IPOs). Indeed, Leapmotor went public on September 30, and since then, its stock price has been falling continuously. The other listed new EV brands are all in the same bag: As of November 22, the stock price of NIO has fallen by about 69% this year, that of XPeng has fallen by about 85%, and Li Auto has fallen by about 46%.

In stark contrast, in October, Aion 广汽埃安, the EV brand launched in 2018 by GAC Group 广汽集团, an automaker established in 1997, completed Series A financing of no less than 18.29 billion yuan ($2.62 billion), setting a new record for the largest single private equity financing in China’s EV industry. In November, Voyah 岚图汽车, the EV brand launched in 2018 by Dongfeng Motor Corporation 东风汽车 — which was founded in 1969 and is one of China’s Big Four automakers — also completed Series A financing of 5 billion yuan ($718.51 million).

The capital markets clearly believe that EV brands that are backed by traditional car companies are a safer bet. Aside from Aion and Voyah, new brands from old companies include:

• IM Motors 智己汽车 by SAIC Motor 上汽集团
• Avatr 阿维塔, a joint venture between Chang’an Automobile 长安汽车集团, CATL 宁德时代, and Huawei 华为
• Zeekr 极氪 by Geely 吉利汽车

Consumers are following investors, judging by EV sales numbers. The year 2021 saw high sales numbers for the Wei Xiao Li and other new brands like Leapmotor and Hozon Auto 哪吒汽车, leading them to set very high goals for 2022: NIO’s annual sales target was 150,000 units, Li Auto’s was 200,000 units, and XPeng’s was 250,000 units.

Yet 2022 has been very tough for these EV brands and they have no chance of reaching these sales targets. In fact, this year has been a breakout year for China’s traditional auto companies in the EV industry. According to data by the China Passenger Car Association, cumulative EV sales from January to November 2022 went as follows:

• BYD was out ahead with sales of 1.57 million, a year-on-year increase of 220.9%.
• Next on the list were the joint venture SAIC-GM-Wuling 上汽通用五菱 (a producer of small EVs) with 403,258 units, and Tesla with 397,844 units.
• The next four companies on the list are all traditional fuel companies, which have all achieved stellar annual growth rates: Geely with 265,879 units (an increase of 312.2%), Aion by GAC Group with 243,750 units (an increase of 121%), Chery 奇瑞汽车 with 208,747 units (an increase of 170.2%), and Chang’an Automobile 长安汽车集团 with 177,919 units (an increase of 169.3%).
• The only new EV companies to make the top 10 was Hozon Auto in eighth place with 142,872 units (an increase of 139.9%) and Li Auto in 10th place with 112,013 units (an increase of 46.6%). XPeng came in 11th place with 109,465 units (an increase of 33.2%) and NIO was 12th place with 106,671 units (an increase of 31.8%).

Not only are the Wei Xiao Li brands not reaching anywhere near their sales targets, they are also losing bucketloads of money. In the third quarter of 2022, the three brands reported a collective net loss of 4.1 billion yuan ($589.17 million). And the stark reality that the traditional fuel companies are now becoming proficient at manufacturing EVs (and are flush with cash to boot) is a highly discouraging sign for new players.

How did the traditional automakers pull it off?

As our profile of VW’s problems in China outlined last week, traditional car companies can have great difficulty to successfully transition to producing EVs. But they do have inestimable advantages in terms of access to financing (or the ability to absorb financial losses), and mature supply chains and production platforms. A crucial factor in BYD’s stratospheric success, for example, was its highly developed lithium-ion battery production capabilities.

Over the last few years, moreover, traditional car companies have reportedly recruited a large number of software and information technology engineers. According to one article, they have implemented a process known as “run fast in small steps and iterate rapidly” (小步快跑,快速迭代 xiǎo bù kuài pǎo, kuàisù diédài) by which they utilize their large research and development resources to refocus production platforms for EVs.

The market itself is the best authority, and the sales numbers for 2022 don’t lie.

The takeaway

All of China’s EV companies have learned that building EVs requires extraordinary amounts of money, and many of the new players have simply been unable to maintain liquidity. Even the Wei Xiao Li brands are still very much in danger of going under. Although the traditional fuel companies were slow to embrace EVs, 2022 has marked a significant shift in the market as these older auto companies are now beating out the newer EV brands.