Chinese electric carmakers might not be ready, but the money is

In recent years, a raft of Chinese entrepreneurs have been going around pitching and fundraising for their electric vehicle startups, but consumers haven’t seen much of those promises materialize until recently. On October 12, XPeng Motors unveiled its first pre-production run of 15 electric cars in China’s east-central city of Zhengzhou, where XPeng’s OEM partner—local automaker Haima Automobile’s subsidiary—is located. This batch, XPeng claims, are the first mass-market EVs born from a Chinese internet car company.

The term “internet car” was coined to loosely refer to cars that are either an IoT connected device, uses the lean startup approach of rapid iteration and shorter product development cycle, or has a top management team hailing from the internet industry. The cars are also, of course, electric.

China’s rush to EVs is made possible by a flood of big-name venture capitalists looking for the next big thing. Among XPeng’s early investors are tech bosses such as He Xiaopeng, founder of Alibaba-owned browser UCWeb; Li Xueling, founder of Nasdaq-listed streaming platform YY Inc; Wu Xiaoguang, former vice president of Tencent; Yao Jinbo, founder of China’s Craigslist equivalent 58.com; Fu Sheng, CEO of Cheetah Mobile; and David Zhang, founding managing partner at Matrix Partners, says the automaker. Chinese tech giant LeEco has had a well-funded electric car project but is struggling to keep it up following the company’s recent fall from grace. LeEco’s new-energy automaker partner Faraday Future has already steered away from their initial plan to build a $1 billion new energy plant in Las Vegas.

“The mobile space has already been divided up amongst the country’s behemoths and to some extent, monopolized. Cars and homes are the two spaces where there still exist opportunities,” Foo Jixun, Managing Partner at GGV, also a backer of XPeng, assured He Xiaopeng as the two conversed in a fireside chat at the venture firm’s “Evolving Lifestyle” conference in October.

The Chinese-Silicon Valley mashup Nio (formerly NextEV), whose first mass-market model is slated for December 16th, has a similarly impressive lineup of backers (in Chinese): Pony Ma, founder of Tencent; Lei Jun, founder of Xiaomi; Richard Liu, founder of JD.com; Li Xiang, founder of Autohome Inc.; and Zhang Lei, founder and CEO of Hillhouse Capital Group.

The Chinese government is also keen to electrify the nation’s cars. For one, the combustion engine accounts for about 30% of the country’s air pollution, said Yang Chuantang who served as China’s Minister of Transport from 2012 to 2016. But Beijing might be more wary of its national security. In 2014, China surpassed the US to become the world’s largest net importer of petroleum and other liquid fuels with imports accounting for 60% of oil supply in 2015. The electrification push is, in fact, part of Beijing’s ambitious “Made In China 2025” policy, which seeks to transform the nation from a low-cost world factory to a high-tech global power. As such, Beijing has shelled out massive subsidies and made favorable rules for the sector. The latest boost came in September when Beijing set a deadline of 2019 to impose sales targets for EVs and hybrids cars.

Cool-headed industry observers, however, worry that China’s capital- and subsidy-fuelled electric carmakers are about to blow a bubble.

“From concept design, prototyping and testing, iteration, selection of parts supplier, production line setup, to mass production—the lifecycle of a car usually takes 3-5 years or even longer,” Tony Cheung, a student from Tsinghua’s Department of Automotive Engineering told TechNode. Automotive startups of the last decade—BYD and Geely for example—had a good 20 years to spend on trial and error. The new wave of EV startups are unlikely to enjoy the same luxury as venture capitalists expect faster returns.

On a summer day in 2015, Huang Xiuyuan, the 28-year-old founder of Youxia Motors, emerged onto the stage at Beijing’s upscale Taikoo Li shopping area. He proudly showcased the design of a high-performance electric sedan, only to be immediately mocked by car veterans for being a shameless Tesla copycat and unrealistically setting a deadline of 482 days for mass production—and with only 50 employees. Youxia indeed failed to meet its ambitious deadline, and a term was coined to describe the fad—powerpoint-made cars: Be all talk and no action.

“Cars are a special product. Their structure is complicated, their lifecycle is long, use cases vary greatly, and they demand safety, comfort, and luxury all at once,” Cheung tells us. “These features and requirements remain the same for the so-called internet cars, and their competitive advantage is not so obvious. I think a better solution for them is to work with conventional automakers.”

This might partly explain why XPeng Motors, who wanted to make cars from scratch at their Guangdong-based factory (which it poured 10 billion RMB into), launched their first mass-market model with Haima. But contract manufacturing is nothing new. “Many OEMs, especially premium brands, such as BMW would occasionally turn to contract manufacturers (Magna is a big one) for production of certain models,” writes Dave Cai, Principle of Digital Venture at the Boston Consulting Group, in his blog.

This reverence for conventional automakers is echoed by Nio’s founder William Li Bin, who was founder of New York-listed BitAuto (and Chairman of Mobike). “We don’t think a new startup can replace an established company with decades of experience in hardware manufacturing,” Li said in an interview with local media. “A lot of things operate according to fundamental rules, and we need to respect these rules instead of trying to disrupt them.”