Date:04-01 17:55 Source：The Economic Observer Authour：Gao Feichang, Ye Yan
In March this year, The Economic Observer reviewed data released from January 2015 to March 2016, which showed that in a little more than a year, more than 30 NEV projects were launched across the country representing a total investment of more than RMB100 billion and a total planned production capacity of more than 3 million cars.
"It's crazy. Investors are pouring money into this area and local governments are inviting more projects," a source who has studied NEVs for a long time told The Economic Observer on March 24. In the past year, the NEV industry has experienced sharp surges of investment every few days. The said researcher sounded concerned: "It's so overheated that it doesn't feel right anymore.”
His judgment was just a "feeling", but the investment surge in NEV industry is actually far beyond expectations. In March this year, The Economic Observer reviewed data released from January 2015 to March 2016, which showed that in a little more than a year, more than 30 NEV projects were launched across the country representing a total investment of more than RMB100 billion and a total planned production capacity of more than 3 million cars.
These projects include NEV projects carried out by more than 10 domestic passenger car makers, controversial "low-speed EV" projects by commercial car makers, and NEV projects that haven't obtained production authorization yet. Projects for modified cars and low-speed EVs, which make up the largest proportion, are the favorites of local governments because of their low technical barriers.
NEV projects are just the tip of an iceberg of investment frenzy, and further investments are under way along the whole NEV industrial chain. "As far as I know, (standard automakers) don't have serious overcapacity, but investment in the battery field is obviously excessive," Wang Binggang, head of the supervisory and advisory panel of the national 863 "energy-saving and new-energy vehicle" project, told us on March 22.
According to the statistics we have assembled, RMB7 billion was invested in the domestic battery industry in the first two months this year, and according to available information more than RMB100 billion had already entered this area last year, producing a total of more than RMB200 billion already. "Such high-speed investment has never been seen before. Both traditional automakers and companies that are not involved in this industry are pouring money in," said an investment professional. Moreover, a sum of money so large that a specific figure is impossible to specify, has also entered the downstream area of charging poles. "Battery overcapacity is inevitable," Zhang Tianren, chairman of Tianneng Group, which is a leading lead-battery producer in China, told us in March this year. He is clearly worried about the explosive growth in battery investment. In 2015, NEVs registered massive growth both in production and sales, and favorable policies have ignited investors' enthusiasm. There is no doubt that an unprecedented investment wave is sweeping over the whole country.
In the meantime, NEV production capacity has increased drastically nationwide. Traditional auto projects also went through a period of massive expansion and the consequent overcapacity remains a big headache today; it is a heavy burden and an impediment to the auto industry getting bigger and stronger. Today, the new investment wave fanned by local governments, automakers, and investors in the NEV industry is once again triggering worries over redundant construction and expansion of quickly outdated capacity.
Unstoppable "investment impulse"
According to data from China Association of Automobile Manufacturers (CAAM), 340,471 NEVs were produced and 331,092 were sold in 2015, up by a factor of 3.3 and 3.4 YOY respectively. Given such a high growth rate, and the fact that automakers were all preparing their 13th Five-year Plans, most automakers released their NEV development plans for the next 5-10 years last year.
We reckon that the 2020 NEV sales targets announced by domestic automakers including FAW, Dongfeng, Chang'an, SAIC, GAC, BAIC, Chery, Geely and Greatwall amount to nearly 4 million units, which is close to the national plan for 5 million (accumulative sales), but some of those plans have been criticized as "too aggressive" by industry insiders.
For instance, Geely plans to have NEV sales account for 90% of its total auto sales by 2020. Previously Geely announced a 2020 sales target of 1.2 million units, which means NEV sales will reach 1.08 million, representing 20% of the national plan for 5 million. Geely Group's chairman Li Shufu has said on several occasions that the company is fully prepared and ready to realize the 2020 target.
We also estimate that to achieve their goals, the above automakers have already invested up to RMB80 billion in NEVs - most of which has been raised in the capital market, making NEV a hot buzzword in that market these days. It is well-known that an important reason why investors are so enthusiastic about NEVs is the policy of national subsidies. Statistics show that more than RMB30 billion in NEV subsidies were granted in 2015.
Most of the automakers above are developing new-energy passenger car projects, but commercial NEV projects were actually being developed earlier and on a larger scale. In recent years leading bus companies like Yutong, Zhong Tong and King Long have announced their NEV development plans, and their total investment in NEVs is more than 10 billion.
As a matter of fact, in the NEV sector, the investment scope has gone far beyond traditional passenger cars and commercial vehicles. If investment from traditional automakers is considered "from inside the industry", capital "from outside the industry" is too diversified to be listed. Against the background of incentives for NEVs, enterprises originally engaged in Internet car-making and auto-related industrial chains have all turned their eyes to auto manufacturing and low-speed EVs, trying to attract capital through talk of NEVs.
The Economic Observer conducted an overview of NEV projects, either planned or under construction, in different places nationwide from 2015 to date, and identified more than 30 current projects representing a total investment in excess of RMB100 billion. These NEV projects mostly exist in the form of "NEV Industry Parks" along with many low-speed EV projects.
For example, on October 23 2015, Shanghai-based TJ Innova Engineering & Technology (TJ Innova), a specialist in auto design, invested RMB3 billion in Chengdu's Jintang County to build an NEV project with an annual capacity of 100,000 cars, including EVs and hybrids. On January 5 2016, Hebei-based YOGOMO, focusing on low-speed EVs, invested RMB3 billion in Jiangsu's Wuxi to build a project that produces low-speed EVs, battery packages and control systems.
Second "car-making movement"
The excessive growth of the NEV industry over the past year is a deep worry for many auto experts. "Driven by subsidies, NEVs have developed so rapidly that they can easily channel corporate resources to capacity expansion." According to Chen Qingtai, President of China EV100 and Deputy Director of State Council Development Research Center, "The increase in output and market scale doesn't mean technological progress. China lags far behind developed countries in EV technology. If we squander all our resources on expanding production capacity, our prospects will be very poor."
But the NEV expansion that Chen Qingtai is worried about is already taking place with a great fanfare across the country. Of the 30+ NEV projects under construction that are mentioned above, total production capacity amounts to 3 million units, far more than the national plan which allowed for NEV production capacity of 2 million units in 2020.
It is worth noting that in addition to low-speed EV projects for which market access is to be determined, those mentioned above also include projects by passenger car makers who had already ceased production. Now the NEV investment boom has given them an opportunity to reincarnate and turned them into “new NEV manufacturers”.
For example, FDG Electric Vehicles Limited, listed on the Hong Kong Stock Exchange on June 8 2014, reorganized the Hangzhou Passenger Car Company that was on the verge of shutdown, and invested RMB5.1 billion in Hangzhou's Yuhang Economic and Technology Development Zone to build the Changjiang EV, which will produce pure electric buses, electric light and medium duty commercial vehicles, and electric passenger cars. But the head of the company said in a recent interview that they haven't obtained production authorization yet, although a batch of SUV passenger cars have been manufactured on a trial basis.
Many other NEV manufacturers have, like Changjiang EV, chosen to launch projects even though their manufacturing authorization isn't in place yet, but their objective varies. Some of them have genuine R&D and technological capability, are able to provide quality product, and can hope to compete in the market. Others are simply aiming to collect the national NEV subsidy, and the rest will have to start production in order to obtain their manufacturing authorization.
In fact there is no shortage of companies that fall into that third category. In July 2015 NDRC issued its Regulations on New Electric Passenger Car Manufacturers, an important measure to promote industrial competition and introduce foreign competitors to act as "catfish". It has attracted many companies and investors able to and interested in making cars. A number of companies from outside the auto industry have also taken this as an opportunity to enter the pure EV sector and realize their dream of becoming “automakers”. IT companies hoping to get an entry into the NEV industry are most enthusiastic about car-making.
But according to current regulations, in order to obtain manufacturing authorization Internet car makers have to own the four major processes in traditional auto manufacturing, namely having a production base. This forces them to build plants or find manufacturing partners, thus increasing NEV production capacity.
Li Bin, founder of NEXT EV, a company that was founded last year, told our journalist quite frankly that "the requirement for new capacity is unreasonable because it is obvious that there is already excess NEV capacity, and further expansion will be bad for industrial development." Li Bin has been calling for policy changes so that there will be better opportunities for genuinely capable companies that want to make cars.
"New wine in old bottle" again
However, local governments have a great passion for NEV investment because it can drive the local economy. Just open the official website of some cities' economic development zones and you can easily find information about NEV projects. According to the founder of a new EV company in China, to attract NEV projects, some local governments are even promising to provide free land and fiscal subsidies.
An NEV investment specialist analyzes the situation thus: "That is typical of how local governments support auto projects. It was seen in the previous round of traditional auto capacity expansion, but now the target of support has shifted from traditional cars to NEVs. You may notice that most of the NEV projects that have been successfully launched are distributed across central and western regions where the auto industry isn't developed. The reason is simple - the auto industry is needed more urgently in central and western regions than in eastern regions, in order to drive their economic development."
We found a survey of auto industry parks across the country released by a consulting organization, according to which auto industry parks that failed in the last round of auto capacity expansion are likely to be relaunched as NEV industry parks during the current NEV surge. Projects that were piloted in the period of "10 cities, 1000 NEVs" (an NEV promotion program that was launched by MOST, MOF, NDRC and MIIT in 2009, which planned to develop 10 demonstration cities of NEV manufacturing every year for three years, with each city producing 1000 NEVs) but were subsequently left idle, are now being revived. The survey also pointed out that the best direction for the upgrade and transformation of auto industry parks is now via NEVs.
It's clear that investing in NEV capacity expansion goes counter to the national objective of encouraging NEV makers to change their focus from "quantity to quality", but the government also needs to consider how to encourage new entrants to get onboard because the industry can only develop properly when there is full competition.
The surge in NEV investment all over China is unlikely to subside any time soon, and new NEV projects are being launched almost every month. In the industrial chain as a whole, the upstream battery sector has already felt the pain of overcapacity. According to Wang Binggang, "Battery investment is already overheated. Batteries are not something that just anybody, any team can do well."
Wang takes the view that NEV development will eventually rely on the market economy. Investment may overheat for a while, but what's most important is to make breakthroughs in quality and technology, which is the only way to keep NEV safe from the old route of overcapacity in low-level product. "I think there is a structural misalignment between government encouragement and the reality of the NEV industry. The solution is to establish new technical standards and select the enterprises with the most advanced technologies."