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The next China trade battle could be over electric cars

Hundreds of Chinese companies are chasing a piece of the battery-powered-car market, backed by generous government support

Electric taxis at a charging station in China. (Qilai Shen/Bloomberg)

SHANGHAI — As Tesla inaugurates a $2 billion electric-car factory in China this month, a brief stroll around an upscale shopping district here shows the company already has plenty of local competition.

Electric taxis with green license plates cruise past the luxury boutiques of West Nanjing Road, fresh off the assembly line of state-owned SAIC Motor Corp. Storefronts for Chinese carmakers Byton and WM Motor display sleek new battery-powered models. And across from a Tesla dealership sits a multistory sales outlet for Nio, a Chinese company that delivered 20,000 electric cars to buyers last year.

“Tesla is definitely the pioneer of this field, but we are becoming stronger and stronger,” said Nio executive Izzy Zhu, sitting among customers in the dealership’s second-floor cafe.

For all the success China has had conquering other industries, it never really mastered the art of manufacturing cars with internal-combustion engines. Foreign brands have dominated since the 1990s, when General Motors, Ford, Volkswagen and others began ramping up sales, turning China into the world’s largest auto buyer.

But the electric-vehicle era means, in Zhu’s estimation, that “the chance has come again." China’s government and companies are investing vast resources to pursue it — setting the stage for another U.S.-China economic rivalry even after the signing of a trade truce.

The Chinese government has spent at least $60 billion to support the fledgling electric-car industry, including research-and-development funding, tax exemptions and financing for battery-charging stations, according to the Center for Strategic and International Studies, a Washington think tank. That’s encouraged a whopping 400-plus Chinese companies to get into the electric-car business, CSIS said.

Few of those companies have cars on the market, however, and many will fizzle, analysts say. Even those selling vehicles are encountering problems that leave the future of China’s experiment uncertain.

After several years of booming electric-car sales, driven by generous government subsidies for buyers, the government last year started cutting those funds, causing sales to fall.

Unreliable batteries and other quality problems have also dampened consumer enthusiasm. Nio last year recalled 4,800 car batteries after reports of several fires, worsening the unprofitable company’s already precarious finances. The startup lost $1.2 billion in the first nine months of 2019 and recently warned it could run out of cash this year unless it raises new funding.

But some Western analysts still worry that China’s investment could ultimately threaten foreign auto company sales in China and beyond.

One particular concern: that an oversupply of battery-powered vehicles in China could prompt the country to export at cut-rate prices. American officials and companies have long complained that China’s hefty government subsidy of industry leads to excess production of goods such as steel and solar panels, which spill into global markets and make it hard for U.S. companies to compete.

“A rush of Chinese exports could create challenges not only for individual competitors abroad but also put pressure on the entire auto industries of other countries,” Scott Kennedy, a China expert at CSIS, wrote in a report on China’s electric ambitions.

For now foreign car companies continue to see gold in China and are boosting local production of their own electric vehicles. Chief executive Elon Musk traveled to Shanghai this month to christen Tesla’s new factory, breaking out his dance moves before a raucous audience. The plant delivered its first Model 3 sedans to buyers during his visit and has the capacity to produce 250,000 cars a year.

In October, Volkswagen and its Chinese joint-venture partners will start production at two factories, in Shanghai and Foshan, with total potential output of 600,000 electric cars a year. Ford in recent months began selling its battery-powered Territory SUV, produced in a joint venture with China’s Jiangling Motors, and is aiming to launch its electric Mustang Mach-E in China in 2021.

Madhavchandra Menon, Ford’s regional marketing director for electric vehicles, called the market competitive but said he likes the company’s chances. “We have products that are state of the art,” he said from Ford’s Shanghai offices.

Consumer demand remains uncertain. On a recent afternoon, several drivers at a battery-charging station in an underground parking lot were lukewarm about their Chinese-brand electric vehicles.

“The cruising power is not that good. With a full charge it is supposed to go 400 kilometers [about 250 miles], but it only goes 200 kilometers,” complained Wang Huanshi, 47, saying the battery on his one-year-old WM Motor SUV had already started wearing down.

Teslas still go much farther on a single charge than their competitors. But the strategy carries risks.

The charger he was using, installed by the state-run electricity monopoly, showed he had been plugged in for 28 minutes and had 50 more to go. He took a walk, then fired up a cigarette and listened to another driver worry aloud about whether electric cars cause hair loss. A third driver, plugged in nearby, killed time playing video games on his phone.

Wang said he bought the car only because electric-vehicle buyers get a license plate right away in China. Earlier he had waited more than six months for a plate for a gasoline-powered car, a delaying tactic China is using to encourage electric purchases. Asked whether he would buy an electric car again, Wang shook his head no.

In an emailed statement, WM Motor said winter temperatures can hurt battery power, but that its batteries have performed well in comparison tests with rival cars.

Last summer, the government cut subsidies to electric-car buyers in half, causing sales of battery-powered cars to fall by 1 percent in 2019 after several years of rapid growth, according to the China Association of Automobile Manufacturers.

Despite consumer doubts, startup companies are piling into the business — many founded by Chinese executives who cut their teeth at Western automakers. A short drive from Volkswagen’s Shanghai campus sits Enovate, a startup led by former VW executives.

Inside the bare-bones offices, more than 100 young engineers worked in a drafty open-plan space, some wearing winter coats for extra warmth.

Sipping from a VW mug, David Xiang, chief marketing officer, said Enovate plans to deliver its first car to the market in the second quarter of this year — an electric SUV that will start at 366,800 yuan, or $53,000. That’s more than the 323,800 yuan ($47,000) starting price Tesla is charging for a Model 3. Nio’s smaller SUV starts at 358,000 yuan ($52,000).

Most of the models coming to market are SUVs because “in China, people like to drive in a big car,” said Zhao Chengyan, an Enovate designer who spent 15 years at VW. In a separate warehouse space, he showed off several models in development and pressed play on an Enovate ad featuring glamorous Europeans socializing in Barcelona.

The ad is meant for Chinese consumers but will air in English, he said. “Sometimes, with Chinese people, they think if you have a Chinese brand you are not high-end,” he explained.

Chinese startups say they have a good shot at the market in part because electric vehicles are easier to make. “The infrastructure from an engineering perspective is lighter and simpler than in a combustion engine,” said Nio’s Zhu, himself a former BMW executive. While a gasoline-powered car has endless moving parts, with an electric vehicle, “you just put a big battery between the two axles, and motors on both of the axles or one of the axles,” he said.

Battery-powered cars raise complicated questions for workers

To manufacture its cars, Nio got a big boost from state-owned Anhui Jianghuai Automobile Group, or JAC.

According to Nio financial disclosures, JAC built a new plant to produce the cars in Hefei, 300 miles west of Shanghai. Nio supplies the raw materials and pays JAC, the factory’s owner, per vehicle produced. On a recent morning, dozens of robots rotated parts around the factory floor, while multi-colored car doors whizzed overhead. Signs on the walls bore messages for the 1,500 employees. “The guy who thinks there is no problem is himself the problem,” read one.

To try to build enthusiasm for its models, Nio deploys its founder, William Li, a charismatic entrepreneur known locally as the Elon Musk of China. Li, 45, had more experience with Internet ventures than auto manufacturing when he founded Nio in 2014, having previously established an e-commerce company and an advertising firm.

Tencent, the Chinese tech giant, was an early investor and owned 15 percent of Nio when the auto start-up listed its shares on the New York Stock Exchange in 2018. Nio hired several veterans of multinational auto companies to help run the business and established an R&D center in San Jose that is attempting to develop autonomous vehicles. After recent layoffs, the California office now employs roughly 250 people.

In late December, before a stadium of cheering customers in the southern Chinese city of Shenzhen, Li took to the stage in jeans and a sweater to introduce Nio’s latest models, Silicon Valley-style. “In the past year, Nio has been through many challenges,” Li said with a bow, in an apparent nod to the battery fires. “We wouldn’t have made it without you.”

He announced that the battery power on Nio’s ES6 model, an SUV, would soon improve to more than 600 kilometers (about 370 miles) per charge. Then, accompanied by strobe lights and blaring pop music, Nio’s latest model rolled onstage to join him — an electric coupe with an all-glass roof.

“You just need to look up to find the beautiful blue sky above,” Li said.

Nio has built about 20 clubhouses in big cities, called Nio Houses, to market its cars and entertain buyers. Nio owners can hang out in the cafe, book rooms for business meetings or leave their kids with a child-care service.

At the Nio House cafe in central Shanghai on a recent morning, owners seemed happy with their cars. Several said not having to wait for a license plate was a big motivation for buying an electric vehicle.

Working on a computer at the blond-wood tables, Pan Yao, 38, said he doesn’t have a dedicated parking space at his apartment building, so he can’t install a home charger. Instead, he pays extra for Nio’s charging service, which dispatches an agent to collect his car each evening, drive it to a charging facility or battery-swap station, and bring it back.

Pan, who works as a designer for theatrical productions, said he was satisfied enough with his Nio that he also bought one for his father, a retired military driver who spent his career piloting Soviet- and Chinese-built trucks.

Joining the conversation by speakerphone, his 65-year-old father, Pan Chuan-e, said he was initially skeptical about the battery life of his Nio ES6 but has become a fan.

“An electric vehicle has a lot of advantages over a gasoline car. It doesn’t smell. There’s no noise. It’s very clean,” he said. “It’s what the country needs for its future.”

Yuan Wang contributed to this article.