On March 5th, Nio (NIO.NYSE), the leader of China’s new energy vehicle (NEV) start-ups, announced a net loss of $9.3B in its annual report. The report also predicted far weaker growth of sales in the future than had been expected, and its factory-building plans are put on ice. Later, its shares plunged 31% amid a 7-day losing streak and its market value evaporated by $4.21B. The number of NEV start-ups have long exceeded 100, while most of them are going to face an existential crisis in 2019. NEV as well as autonomous driving is absolutely a promising direction for investments. But there are no NEV firms worth of an investment so far.

On March 5th, Nio (NIO.NYSE), the leader of China’s new energy vehicle (NEV) start-ups, announced a net loss of $9.3B in its annual report. The report also predicted far weaker growth of sales in the future than had been expected, and its factory-building plans are put on ice. Later, its shares plunged 31% amid a 7-day losing streak and its market value evaporated by $4.21B. The number of NEV start-ups have long exceeded 100, while most of them are going to face an existential crisis in 2019. NEV as well as autonomous driving is absolutely a promising direction for investments. But there are no NEV firms worth of an investment so far.

China’s “car-making spree” has been launched around 2015. As policies have further skewed toward the auto industry, it has again become an investment trend with the capital playing a part in it. The auto industry is both capital and technology-intensive and its finance market size has been probably valued at ¥220.18Bn. With China government withdrawing financial subsidies for NEVs, the industry competition is about to turn policy-driven to market-oriented. As the tide ebbs, these NEV start-ups need to compete against traditional manufacturers with the quality of their products on their own. The success of these new forces depends entirely on their products and brand recognition.

To speak plainly, the recent crop of carmakers in such numbers over a short period isn’t about taking up a fad. Most companies are just coveting the heavily subsidized NEV market with opportunities for a quick profit. However, phasing out subsidies will speed up the reshuffling of the industry this year.

It can be seen that it’s the whole vehicle manufacturers who sit atop the “pyramid” because they have the best brand recognition. The industry only provides limited space for vehicle manufacturers, so we reckon that most vehicle star-ups will go bankrupt this year. Another ending for them is to be acquired by larger whole vehicle makers or taken over by real estate developers who are eager to funnel their money from virtual economy into real economy but act in a foolish way.

That being said, there are still many chances that can be sought from the industrial chain in the fledging NEV market. Apart from whole vehicle manufacturers, there are also auto parts suppliers that are major players in the auto industry like Robert Bosch (BOSCHLTD. NS) , Aisin Seiki (ASEKY). Do Chinese firms have the chance to optimize the NEV industrial chain resources and will there be competitive upstream or downstream companies in Chinese auto industry? These are the things we’re going to wait and see.

Above are excerpts from Zhang Wei’s article Why None of China’s NEV Start-ups Worth Investing In. He sharply criticized Chinese NEV start-ups’ pseudo-innovations and NEV subsidies “cheat”. He noted that zero to one innovation requires long-term accumulation with large capital expenditures, which is hard to be replicated and overtaken in a few years. But he didn’t deny the opportunities in NEV industrial chain because he believed that NEV and autonomous driving are the important trends in the future. Chinese firms still stand a chance to develop into major forces in upstream and downstream sectors by optimizing NEV industrial chain resources.  The editorial was originally published on CoStone Capital WeChat. Access to the full article in Chinese: https://mp.weixin.qq.com/s/VE6g9GWx2xpVS_NMJOrtdw

Rewritten by Lu Ying, Edited by Li Yunzhen