China's booming electric car industry is much bigger than just Nio and Xpeng - CNBC

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SAIC-GM-Wuling Automobile Co. electric vehicles are plugged in at charging stations at a roadside parking lot in Liuzhou, China, on Monday, May 17, 2021.

Qilai Shen | Bloomberg | Getty Images

BEIJING — While investors watched dramatic surges in the stock prices of Chinese electric car makers like Nio and Xpeng, tens of thousands of companies jumped on the bandwagon as the industry grew, according to business database Qichacha.

The number of new Chinese businesses related to "new energy vehicles" surged by 81,000 this year through mid-August, bringing the total to more than 321,000, Qichacha said in a report.

The growth this year comes after 78,600 businesses entered the industry in 2020, during the height of the coronavirus pandemic in China, the database showed.

New energy vehicles refers to a general category consisting primarily of pure-electric and hybrid-powered cars. China is the world's largest market for automobiles, and would like 20% of new cars sold to be new energy vehicles by 2025.

Shares of major electric car makers fell Monday after China's Ministry of Industry and Information Technology indicated there could be sector consolidation.

"Our businesses need to be bigger and stronger," Minister Xiao Yaqing said at a press conference.

"Right now the number of new energy vehicle businesses is too great, and is in a small and scattered state," the minister said, according to a CNBC translation of a Chinese transcript.

"This is just version 2.0 of the central government looking to trim the [number] of entrants as they did when they limited manufacturing licenses [and] permits in 2017," said Tu Le, founder of Beijing-based advisory firm Sino Auto Insights.

"They likely [saw] a buildup of overcapacity [and] too many brands that won't be able to compete in the market with product," he said. "This has happened often in the Chinese market across sectors and leads to a race to the bottom where companies compete solely on price. It stresses the entire sector since these non-competitive companies are happy to throw good money after the bad."

Tu added that he expects China's top electric-car makers Nio, Xpeng Li Auto and Warren Buffett-backed BYD to benefit from efforts to consolidate the industry "since it'll eliminate potential competitors and perhaps allow them to acquire a team or technology to enhance their products."