Turmoil in China’s EV market could accelerate the transition

The boost part, though, is looking a bit tenuous for both established and EV firms. While China’s central government hasn’t stepped in with overarching policy-backed incentives for the wider auto market, as it did in the past, local authorities are rolling out subsidies for car buyers as well as manufacturers. Car companies are throwing in sweeteners, while incumbents are trying to clear stocks of internal-combustion-engine vehicles that consumers will soon shun. EV makers, on their part, are trying to keep up with falling prices and rising competition.

An imminent emissions regulation that kicks in this July is fuelling the growing anxiety. Earlier this month, SAIC Volkswagen Automotive Company offered over $500 million in cash inducements to buy vehicles. It followed over 40 brands that have done the same. The frenzy forced the industry association last week to urge companies to tamp down “price-cut hype.” A few days earlier, state media called the provincial level moves improper.

Since Tesla lowered its prices in China late last year, deepening the electric transition in the world’s largest market, traditional carmakers and their EV peers have been scrambling for solutions to keep up. So far, they have only emerged with haphazard measures, but a more surgical approach may well be the only option as the fittest emerge on top.

Elon Musk’s Tesla and China’s BYD are not making it any easier, as they churn out in-demand electrics en masse at ever-lower prices. Brands like General Motors and Hyundai, which were once significant players in China’s car market, accounting for 18% and 10%, are now waning. The world’s largest car manufacturers, Volkswagen and Toyota, have fallen behind, too.

But old tricks aren’t working the way they did. Overall sales fell 15% in the first two months of the year. These band-aid measures to fix structural issues in the market clearly aren’t sustainable and can’t last for too long. Cutting prices and doling out incentives will raise costs and eat into already-thinning margins.

But perhaps the painful fallout is what’s needed. The breakdown of the years-long boom-bust cycle has a silver lining: A thorough clean-up of China’s vast car market.

Auto manufacturers—traditional and electric—that can’t keep up, including small firms and random brands, will likely be wiped out or consolidated, clearing the way for better vehicles.

The ones big enough to hold on will have to raise their game. Domestic champion Geely Automobile Holdings, for instance, has been waffling under the transition. It is now investing in hybrids and greener, more efficient internal combustion engines.

The price wars and current chaos should force a deeper reckoning in China’s burgeoning EV market, which is now veering toward over-capacity. Factory utilization rates are around 60% and could go lower as more manufacturing plants come online. Beijing has already warned about risks of a glut. Regulators could help streamline the industry’s growth by setting stringent standards for vehicles as they did for batteries. Manufacturers will have to do their part, too, finding a balance between regulation, scale and technology.

For now, some Chinese automakers have been able to take advantage of strong production at home. As the rest of the world attempts to transition to EVs and struggles to manufacture at scale, China has been able to fill the vacuum. So many EVs are being churned out that the country has claimed the title of the world’s second-largest new vehicle exporter.

Chinese companies are gaining share in Chile, Saudi Arabia and Southeast Asia. That may serve them well in the short term, but getting used to the thrill of new and growing markets risks losing sight of a problem China knows all too well: the pitfalls of mass production. Making lots of cars is one thing, but without constant and consistent technological upgrades and investment, the ride won’t last.

If Beijing can resist the urge to wade in when failures arise and instead watch the cycle play out without intervention, it may end up with an evolved version of its wider auto market. A range of solid, high-tech and affordable EV options would be an ideal outcome from the ongoing turmoil in China’s car market.

©bloomberg