There are now 486 EV manufacturers in China, triple from two years ago. Most will disappear.

New vehicle sales in China plunged 14% in the first quarter from a year earlier, according to the China Association of Automobile Manufacturers today. For the whole year 2018, new vehicle sales had dropped 4.1%, the first such drop in modern data going back to 1990.

Despite this historic slump, sales of “electrified” vehicles (battery-electric EVs, plug-in hybrids, and fuel cell vehicles) soared 85% in March compared to a year ago, and 110% in the first quarter, to nearly 300,000 units: 227,000 EVs, 72,000 plug-in hybrids, and 273 fuel-cell vehicles.

Last year, sales of EVs and plug-in hybrids had surged 62% to 1.255 million vehicles, reaching a record 5.3% of total vehicle sales. Of them, a whopping 14,467 were Tesla’s, according to the Ministry of Industry and Information Technology, giving it an EV market share of a minuscule 1.1%.

Sales of electrified vehicles in China are on track to reach 1.6 million units this year, for a share of around 7% of new vehicle sales – on the basis that sales of vehicles powered by internal-combustion-engines (ICE) will continue to slump, while sales of electrified vehicle are surging.

The EV industry in China has been powered by government subsidies. China has been heavily promoting EVs for two reasons: To help reduce often enormous air pollution in big Chinese cities; and to create the world’s dominant EV industry.

Chinese government policies are also attempting to create the world’s dominant EV battery-cell industry. And so far, so good. Here are the largest makers of battery cells for EVs:

China’s CATL. Japan’s Panasonic China’s BYD, which also makes EVs. Korea’s LG Chem Korea’s Samsung. through 10: Chinese manufacturers.

But the subsidies that caused a tsunami of private-sector investment to pile into the battery-cell boom in China are being whittled down, and the weaker battery-cell makers are expected to be culled.

And so too, the government is now reducing the subsidies for electrified vehicles, with some subsidies that were $7,500 per vehicle are being cut in half.

This comes at a bad time for the EV industry: Though sales have boomed, EV startups have mushroomed even faster.

There are now – take a deep breath — 486 registered EV manufacturers in China, having more than tripled in two years. They have attracted billions of dollars in investment.

EV startups span the spectrum, with everyone and his dog unrelated to the automotive industry joining the fray. Last year, online retailer Alibaba and iPhone maker Foxconn led the 2.2 billion yuan ($347 million) funding round for the EV startup Xiaopeng Motors. China Evergrande Group, the country’s second-largest real estate developer, announced grandiosely in March that it “will strive to become the world’s biggest, and the strongest, electric vehicle group within three to five years.”

The EV startups in China that have raise the most funds, according to Bloomberg, include:

NIO: $4.1 billion

WM Motor: $2.3 billion

Xiaopeng Motors: $1.3 billion

Youxia Motors: $$1.3 billion

The startup manufacturers combined promise to build a manufacturing capacity of 3.9 million EVs a year.

Good luck filling that capacity – because the established Chinese giants have already switched part of their production to EVs. Some, such as BAIC and Geely (which also owns Volvo), have announced that they will switch just about totally to electrified vehicles over the next few years.

In addition, the global giants, such as GM and Volkswagen AG, and their Chinese joint ventures are all being forced by the government to build EVs in China, and they’re rolling out dozens of models.

Overall declining or stagnating vehicle sales even as a lot of manufacturing capacity is being put in service makes for a toxic mix of malinvestment and overcapacity. EV manufacturing overcapacity is just part of it. This has dogged other industries in China as well.

If the world ever needs another illustration of a bubble that will blow up and take down lots of investors with it, it’s the EV manufacturing bubble in China. EVs will continue to develop and EV sales will thrive, but not nearly enough for the 486 EV makers currently building manufacturing capacity in China. They will experience a classic shakeout with only a few dozen left over at the end.

Auto manufacturing is a capital-intensive activity, and startups require enormous amounts of investor money to gain traction. As the subsidies are being trimmed and adjusted, and as overcapacity rules, weaker players will run out of money first and shut down. This will go through layers and layers and may take down some established companies too. Industry shakeouts, after an investment and capacity bubble like this, are brutal.

“We are going to see great waves sweeping away sand in the EV industry,’’ Thomas Fang, a partner and strategy consultant at Roland Berger in Shanghai, told Bloomberg. “It is a critical moment that will decide life or death for EV startups.’’

Many of these startups are founded or funded by people with an internet or technology background who’re not necessarily fully aware of the enormous investment required in auto manufacturing, Fang said.

“The investment needed for actual production is several times of that they’ve spent on marketing and production development,’’ he said. “That’s why we are seeing some of them delaying mass-production plans.’’

Sales of EVs – small as they still are compared to sales of ICE vehicles – will continue to grow. But the investors that are funding the EV startups in China face getting bludgeoned by the effects of massive overcapacity in the industry that had been encouraged by government subsidies and policies.

Panasonic froze its expansion and investment plans for the Gigafactory after deliveries of Teslas plunged in Q1. Read… Carmageddon at Tesla-Panasonic Gigafactory in Nevada and Shanghai

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