China has 500 EV start-ups. The country can produce 20 million EVs a year.

The Chinese government is preventing new electric car companies from starting up. The news – reported this week in the South China Morning Post – reveals that China is facing a potential glut of EV production.

According to the Fitch rating agency, China’s established automakers and start-ups have the capacity to produce 20 million electric cars in 2020. That’s 10 times the government’s sales target of 2 million units this year.

The government’s restriction is aimed at new, smaller players – companies that are unable to produce at least 100,000 vehicles a year. These low-volume firms would be prevented from getting a manufacturing license.

The Motor-Lite is produced by BAIC, which can make 300,000 EVs a year. (Photo: Bradley Berman)

China is estimated to have about 500 EV start-ups. These companies are not the ones you’ve heard of – Byton, Nio or SF Motors – or the partnerships between major global car brands and large Chinese entities like BAIC, BYD, and Brilliant.

Last year, I visited the Beijing Motor Show where I encountered hundreds of obscure EV brands. I was able to drive about a dozen of these cars.

Zhidou, which makes the D2S, sold more than 72,000 EVs in 2017. (Photo: Bradley Berman)

The Denza 500, produced in partnership with Daimler, was a quite decent all-electric SUV. But most of them were like the Motor-Lite two-passenger car and the Zhidou D2S, the type of glorified golf carts that were sold in the US before 2010. The Zhidou D2S – like the Fiat 500e, but smaller – was equipped with its own onboard fire extinguisher.

I drove the Zhidou D2S. It came with a fire extinguisher. (Photo: Bradley Berman)

Leaving quality and capability (or the fear of imminent death) aside, it’s remarkable to consider the world’s largest car market as being oversupplied with electric cars. “The move to curb EV investment ticks all the right boxes as all signs are showing that the segment is getting overheated,” Qian Kang, a Zhejiang-based auto entrepreneur told the Morning Post.

The oversupply is occurring against the backdrop of Tesla breaking ground of its Shanghai plant this month. It’s expected to produce up to 500,000 cars per year eventually. In October 2018, Volkswagen began construction of its Shanghai plant that will produce up to 300,000 electric vehicles per year.

Overall retail car sales in China fell by 5.8 percent in 2018 to 22.3 million cars. That was the first annual drop since 1990. On the other hand, 1.26 million so-called new energy vehicles were sold in China last year, representing a 61.7 percent jump in sales. China’s shift from older polluting cars to new electric cars is expected to continue growing this year. However, Bloomberg forecast EV sales in China to reach 1.5 million units in 2019, a more modest rate of growth than previous years.