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Reducing subsidies from China to electric car manufacturers could lead to consolidation



The WM Motor EX5 electric vehicle is on display at the Consumer Electronics Show Asia in Shanghai in June 2019

Arjun Kharpal | CNBC

If you walk around Shenzhen, one of China's major technology centers, you will notice that all taxis are electric. In other major Chinese cities, so-called new energy vehicles are common – with Tesla cars and other models from dozens of local road manufacturers.

China is the world's largest market for electric cars by volume. He has come there with the help of heavy state support in the form of subsidies for car companies. But Beijing is beginning to reduce its support, hitting the moods of investors and urging experts to warn of failures among dozens of electric cars. ranging between about 45% and 60%, and are completely scrapped for vehicles below 250 kilometers for a fee.

This will lead to consolidation of the China electric car market, analysts say.

"Before the merger there is always a fragmentation … there will be companies that do not do it, the weaker ones will be eradicated quite quickly," said Bill Russo, CEO of Automobility Limited for CNBC.

Some of China's electric car makers, who are now starting to deliver their first cars, are confident they can survive and feel that players at the bottom may be affected.

"In general, I would say that besides short-term elimination, I think this is actually good for the industry because traditionally … the companies that really benefit from the subsidies are low-productivity producers that are not focused on the production of The product ̵

1; They are focused on collecting subsidies from the government, said Brian Gu, president of Xpeng Motors, in an interview with CNBC last week, pushing consumers as they look up the value chain

"Consumers who look at products from short class will have to go up and look at products like WM Motors, "Shen told CNBC in an interview last week

" War of Fatigue "

Despite the current uncertainty in the market, the whole sector seems to be moving in the right direction. While car sales fell 15.2 percent year-over-year in the first five months of 2019, sales of new energy vehicles increased by 41.5 percent over the same period, according to the China Automobile Manufacturers Association. In May, electric cars account for about 6.6% of total passenger car sales in China.

Autoproducers are currently pursuing their market share by looking to increase production, open exhibition halls, and deliver products. Some, like Xpeng, even check their own travel service.

The focus of these companies is not on profits. For example, Nio, which is listed in New York, lost $ 390 million in the first quarter of the year. Xpeng and WM Motor are private companies and do not release funds.

In an effort to increase their market share, Chinese carmakers collect huge sums of high-end investors. $ 434.5 million) funding round in March, led by Chinese technology giant Baidu. Tencent Nio backed $ 1 billion in its initial public offering in September. While Xpeng told CNBC, he was looking for a "comparable amount" of nearly $ 600 billion in funding last year. Xpeng counts Alibaba among its investors.

But investors' moods towards electric car makers have worsened, especially in public markets. Nio shares are 60% lower, while US competitor Tesla is 32% lower.

"I think that the general macro-environment in the commercial sector as well as in the electric vehicles sector as a whole, the performance of public companies' trading … is not stellar. , on investment sentiment, "said Guan Xpeng.

" But I think investors are still willing to say, I would say, the best companies in the sector. So I think this will probably create more trouble for followers who have no product in the coming months. Rusko said the cost of electric car companies would increase as they will continue to roll out new models, increase production, open showrooms, and build infrastructure. This could lead to a race between those carmakers who are resilient.

"Will there be consolidation? Yes, because the price of not only building a product but also supporting infrastructure to present the product on the market is quite high," Rousseau said.

"How deep are the pockets of investors, whether they are ready to withstand long-term losses?" In some cases, the answer is "yes." They see the long-term potential of this market to become exponential, "he said. "But to get there, you have to survive for a few years of losing money, and this will be a war of exhaustion for some of the companies in this space."

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