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Home»Finance»Why Are Some Chinese EV Startups Failing Despite the Industry’s Global Success?
Finance

Why Are Some Chinese EV Startups Failing Despite the Industry’s Global Success?

February 20, 2025No Comments6 Mins Read
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Why Are Some Chinese EV Startups Failing Despite the Industry’s Global Success?
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China’s transformative impact on the electric vehicle (EV) sector is redefining global trade dynamics and supply chain configurations, unleashing ripple effects across continents. From industrial overcapacity to cutthroat price wars, China’s EV surge has sent shockwaves through the automotive industry, as evidenced by mass layoffs and factory closures among Europe’s long-established automotive giants. Seizing the opportunity, Chinese EV firms have begun to take over these legacy facilities, turning them into hubs for their global expansion.

Faced with domestic overproduction, relentless price competition, and external trade sanctions compounded by geopolitical tensions, China’s EV enterprises have not only retained a comparative edge but also continued their relentless global overstretch. This dual trajectory – pioneering renewable energy transitions while grappling with economic structural crises – has granted China rare breathing space amid mounting economic pressures. The interplay between EVs and solar industries exemplifies how industrial policy has afforded Beijing a semblance of structural resilience, if not outright glory.

Induced Competition

At the heart of this transformation lies Beijing’s unwavering commitment to state-led industrial mobilization. Early-stage subsidies, tax incentives, and infrastructure projects – hallmarks of China’s industrial policy – galvanized markets and enterprises alike. The state’s overzealous interference, once derided as inefficiency, has now showcased the unique strengths of China’s socialist market economy. While domestic challenges such as a fragile real estate sector, insufficient internal demand, and structural imbalances persist, Beijing’s belief in the coexistence of an effective market and an active state underscores its development model’s resilience.

The government’s mobilization-oriented approach has compelled legacy automotive players to pivot toward green energy and spurred the emergence of new entrants in the EV sector. The induced competition – rooted in policies like subsidies, tax breaks, and infrastructure support – enabled rapid expansion of EV enterprises but also led to market saturation domestically. As domestic competition intensified, companies shifted their focus abroad, leveraging economies of scale to carve out niches in international markets.

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Yet, this high-stakes expansion has left little room for latecomers. In a brutal landscape of thin profit margins and strategic pivots by shareholders, some firms have been unable to endure. The recent collapse of Ji Yue Auto, a joint venture of Baidu and Geely, stands as a stark reminder of the pitfalls in this frenzied expansion. Ji Yue was opening new stores mere days before its shutdown; its abrupt collapse reflects the inherent volatility and ruthlessness of China’s domestic EV market. While its evolution is controlled on a macro level, from the perspective of individual firms the sector is chaotic.

Past discussions on China’s industrial policy have primarily focused on how the central government’s mobilization system and large-scale subsidies incentivize local governments and enterprises to enter green transition industries, gradually transitioning these sectors into market-driven operations. However, since COVID-19, China’s economic structural crisis – marked by a real estate bubble and systemic inefficiencies – has exposed the vulnerabilities of a locally implemented industrial policy framework.

Local governments, spurred by central policies that foster induced competition, have flocked to strategic industries designated for national development. This has led to widespread industrial homogeneity, where local governments develop strikingly similar industrial portfolios. While market mechanisms eventually yield a handful of regional winners, the overall output is dominated by oversized, inefficient champions, resulting in redundant construction and overcapacity across sectors. Meanwhile, the losers of this competition – industries that fail to adapt – are artificially sustained through secondary interventions by local governments, often surviving just long enough for the next induced industry to emerge.

This nationwide industrial homogeneity has triggered vicious competition and market fragmentation. Local governments protect their homegrown enterprises by carving out market shares, achieving short-term local economic gains. However, on a national scale, this creates a prisoner’s dilemma, that is, rational local behavior results in collective irrationality, manifesting in overcapacity, cutthroat competition, and fragmented industries plagued by inefficiency. Amid these systemic losses, the survivors – the rare regional winners – emerge as nationally recognized firms, consolidating their dominance while propelling their regions into economic prominence.

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Go Big or Go Home?

In the EV sector, battery production has become the linchpin of automotive manufacturing. The rivalry between BYD and CATL in the lithium battery market epitomizes two distinct models within China’s industrial policy. CATL, based in Fujian Province, has built its success on specialized battery production, whereas BYD, headquartered in Guangdong Province, has embraced a vertically integrated structure, combining vehicle and battery manufacturing in a mutually reinforcing cycle. This approach has enabled BYD to challenge CATL’s market dominance and carve out a unique position in the global EV ecosystem.

As Chinese EV firms expand abroad, the role of local industrial policy takes on broader geopolitical and industrial significance. Local governments’ strategic support has not only underpinned domestic competition but also amplified the global ambitions of these firms. These dynamics reflect China’s evolving approach to industrial policy, an interplay of local innovation and national ambition, reshaping not just its domestic economy but also its position in the global energy transition.

Chinese, Japanese, and South Korean companies dominate the global EV battery manufacturing landscape with over 90 percent of market share. Chinese firms, such as CATL and BYD control approximately 50 percent of global production, covering the entire value chain from raw material processing to battery storage, management, and recycling. These companies benefit from intense domestic competition and targeted industrial policies, thus enabling China to cultivate a regionally distinctive and vertically integrated clean energy sector. 

Regarding EV manufacturing, the Hefei municipal government’s investment in NIO, one of the country’s largest EV brands, has become a model for local government development, widely known as the Hefei Model. This partnership not only revived NIO during its financial struggles but also spurred the development of a high-tech manufacturing cluster in the surrounding region.

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However, as price wars intensify and the domestic market reaches saturation, some automakers have turned to overseas expansion as a survival strategy. Hozon, a struggling EV startup, has pursued an aggressive international push but has encountered new challenges abroad. Meanwhile, its domestic operations are facing turmoil, with production halts at factories established in partnership with local governments in Nanning, Guangxi Province, and Tongxiang, Zhejiang Province. This presents local authorities with a difficult choice: whether to inject public funds to rescue the company or let the market take its course.

China’s EV industry stands at a crossroads, with its rapid expansion reshaping global supply chains and industrial landscapes. The interplay of state-led industrial policy, fierce domestic competition, and global market aspirations has propelled Chinese EV firms onto the world stage. However, the same forces that fueled their rise – subsidies, local government interventions, and induced competition – are now contributing to overcapacity, price wars, and the collapse of weaker players.

As Beijing recalibrates its industrial strategy, the sustainability of China’s EV dominance will hinge on its ability to balance market efficiency with state intervention. The next phase of expansion will require not just aggressive overseas market penetration but also structural reforms to mitigate industrial redundancy and financial strain. Whether China can sustain its competitive edge in the global EV market depends on how effectively it navigates these challenges, ensuring that its industrial might does not become a victim of its own excesses.

Chinese Failing Global Industrys startups Success
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