On Monday, China’s minister for industry and information technology, Xiao Yaqing, told reporters that the country’s electric vehicle (EV) sector is too fragmented and in dire need of consolidation.
“Looking forward, EV companies should grow bigger and stronger. We have too many EV firms on the market right now,” Xiao said during a press conference, adding that the firms involved in China’s EV sector are “mostly small and scattered.”
According to state-owned Xinhua, there are some 300 EV makers in China. Since 2010, Beijing encouraged the sector’s development by offering tax breaks for companies entering the market and subsidy schemes for consumers who purchased EVs. Now the government suggests market forces should weed out the weaker firms.
“The role of the market should be fully utilized, and we encourage merger and restructuring efforts in the EV sector to further increase market concentration,” Xiao said. Beijing has already reduced some of its subsidy schemes, forcing EV makers to raise retail prices, but Bloombergreports the government will create new regulations to spur consolidation.
According to Bloomberg,regulators plan to address the issue of too many underutilized suppliers by setting minimum production capacity utilization rates for EV manufacturers on a per province basis. If capacity utilization in a province falls below a set threshold, Beijing will prohibit the local government from green-lighting new production facilities until firms close the shortfall. Last year, the national production capacity utilization rate averaged 53%.
Shares in China’s leading EV makers fell on Monday, following Xiao’s remarks. BYD, one of the world’s largest electric-car makers, plunged 4.4% in Hong Kong, while Hong Kong–listed Li Auto and Xpeng slipped 1.68% and 2.8%, respectively. Li Auto is also listed on the Nasdaq, while Xpeng has a primary listing in New York.
Despite the selloff, China’s listed EV manufacturers are perhaps the best-positioned to benefit from the government’s push for market consolidation, as tighter regulations squeeze out smaller firms with less access to capital.
“It doesn’t surprise me that share prices have fallen, but overall I see China’s Big Three—Nio, Li Auto, and Xpeng—benefiting in the long run,” says Tu Le, founder and CEO of auto industry consultancy, Sino Auto Insights. Le says the new regulations could create an opportunity for well-financed players to acquire new talent and technology from smaller firms.
Earlier this month smartphone maker Xiaomi entered the EV business, launching a subsidiary with $1.55 billion in registered capital. The group pledged to invest $10 billion in the EV sector over the next decade and, in August, acquired autonomous driving tech firm Deepmotion for around $77 million. Around the same time, Xiaomi declined to purchase the EV unit of China Evergrande, the world’s most indebted property developer.
“This could be Xiaomi’s opportunity to spend some of that capital on a promising team, technology, and products,” Le says.
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