A view of electric cars owned by a local car-sharing company in Wuhan, China. Feature China | Barcroft Images | Barcroft Media | Getty Images

BEIJING — When an idea strikes a chord with national ambition in China, the result can be millions of dollars wasted and a handful of start-ups struggling to survive in a cooling economy. In the last few years, venture capitalists rushed to pour billions of dollars into the emerging electric vehicle industry backed by the Chinese government. So far, it's less clear how that bet has paid off. Take a look at the recent headlines: Shares of U.S.-listed Nio, arguably China's closest competitor with Tesla, are down more than 50% this year to about $2.70 each.

In November, Alibaba-backed XPeng tapped its own Chairman and CEO He Xiaopeng for a $400 million investment round, in which electronics company Xiaomi participated as a strategic investor.

Shenzhen-based BYD, which counts Warren Buffett as an investor, said in late October that net profits, ex-items, fell 130.1% in the third quarter. The Hong Kong-listed shares are down 25% for the year so far. These are some of the handful of survivors from Beijing's efforts over the last decade to accelerate the creation of China's own electric car.

Now, Chinese auto sales are in a slump, consumer subsidies for new energy vehicles are phasing out next year and economic growth is slowing. Start-ups didn't expect the subsidies to last this long, said Rupert Mitchell, chief strategy officer at Chinese electric car company WM Motor, founded in 2015 by a former Volvo and Geely executive. “What was not in the business plans was that China would have its first fully blown automotive downturn in Chinese history," he told CNBC in late November.

How it all started

Wan Gang was an engineer for Audi in Germany before he returned to China in the early 2000s. Within 10 years, he became China's minister of Science and Technology, despite not being a member of the Chinese Communist Party. Wan convinced the central government to roll out a national strategy for developing new energy vehicles and battery technology. Beijing was eager to jump at an opportunity to become a global leader in an emerging technology, which conveniently tied into efforts to combat pollution. As a result, the central government spent at least 33.4 billion yuan in subsidies between 2009 and 2015, according to the Ministry of Finance. At the height of the subsidy-driven boom, the number of new energy vehicles sold in 2014 more than quadrupled from the year before, and multiplied by more than four times in 2015 to more than 330,000 vehicles, according to data from China Automotive Industry Association accessed through Wind Information. In 2016, the Ministry of Finance said it found at least five companies cheated the system of over 1 billion yuan. That year, new energy vehicle sales grew just 53%, data showed. High levels of subsidy misuse are not uncommon in China. Between 2001 and 2011, about half of Chinese companies receiving direct grant subsidies for research and development were non-compliant, using the funds for other things such as private consumption and investments with higher returns. That's according to a forthcoming working paper from Philipp Boeing and Bettina Peters, both researchers at the ZEW – Leibniz Centre for European Economic Research. The study did not cover consumer subsidies.

The research did indicate that misuse of funds declined with time and that the actual effectiveness in Chinese government policy in spurring research and development, if monitored, increased and non-compliance was wiped out, Boeing said in an interview. But he noted there is little impact on productivity in the long term, which is a core problem for China's economy.

Path to profitability