When an idea raids a chord with nationwide ambition in China, the result might be wastage of millions of dollars and a few startups making efforts to survive in a cooling economy. During the last few years, venture industrialists rushed to transfer billions of dollars into the emergent vehicle industry supported by the government of China. Up till now, it’s unclear how that bet paid off. Let’s put an eye on the recent headlines:
- Shares of United States-listed Nio, possibly closet rival of China with Tesla, down over 50% in 2019 to around $2.70 each.
- In November Alibaba supported XPeng nominated its own CEO, and Chairman He Xiaomi participated as a strategic investor.
- Shenzhen-backed BYD that totals Warren Buffett as an investor said in October that net profits, previous items, drops 130.1% in the 3rd-quarter. The shares of Hong-listed fell twenty-five per cent for the year up to now.
These are a few of the handful of survivors from the efforts of Beijing during the last ten years to boost the manufacturing of China’s own electric car. Now, auto sales of China are in a fall, customers grant for latest energy vehicles are phasing out the upcoming year, and economic growth is slowing. Rupert Mitchell, chief strategy officer at WM Motor, a Chinese electric car company, said that start-ups did not assume the subsidies to last this long. The former executive of Volvo and Geely founded WM Motor in 2015. In late November, he told CNBC that China would have its first completely blown automotive downturn in the history of China wasn’t in the business plans.
How it initiated
Wan Gang was working as an engineer at Audi in Germany before he switches back to China in the early 2000s. Just in ten years, he became minister of Science and Technology of China, regardless of being a member of the Chinese Communist Party. Wan influenced the central government to launch a national strategy for manufacturing new energy vehicles as well as battery technology. Beijing was keen to jump at a chance to become a worldwide leader in emerging technology, that expediently tied into hard work to fight pollution.
According to the Ministry of Finance, the central government of China spent around 33.4 billion yuan in subsidies from 2009 to 2015. According to the statistics from China, Automotive Industry Association (CAIA) took through Wind Information, the number of latest energy vehicles sold in 2014 over quadrupled from the previous year at the height of the subsidy-driven boost and multiplied by over four times in 2015 to above 330,000 vehicles. The Ministry of Finance said in 2016 that it found a minimum of five firms cheated the system of more than one billion yuan. Data showed that sales of new energy vehicles grew just fifty-three per cent that same year.
Misuse of Funds in China
Misuse of subsidy at high levels is common in China. During 2001 and 2011, around half of the Chinese firms receiving straight grant subsidies for research & development were non-complaint. Whereas, using the subsidies for other things like private consumption & investments with high returns. According to an upcoming working paper from Bettina Peters and Philipp Boeing, both working as researchers at the ZEW – Leibniz Center for EER (European Economic Research).
Boeing said in an interview that the research didn’t cover consumer subsidies. However, the study did specify that misuse of subsidies decreased with time and that the real efficiency in the policy of the Chinese government in urging research & development, if watched, increased and non-compliance wiped out. Whereas, he observed a small effect on productivity in the long term, which is a major problem for the economy of China.