China's EV startups: Boom or bubble?

Companies have global ambitions, but few have sold a vehicle

Byton K-Byte Concept

NANJING, China — When setting up a would-be Tesla rival in China, a couple of factors are key.

A fledgling electric vehicle maker needs, of course, oodles of cash. It also must have unblinking government backing. And, crucially, it must be steeped in entrepreneurial ambition.

None of that is in short supply in the world's biggest auto market. EV startups with unfamiliar names are mushrooming here with abandon, seeking to sell cars not just in their own backyard but to make the big time in the U.S. as well. Many are likely destined to fall short of their goals, but even a small number of success stories could trigger big shifts in the global auto industry.

Be it boom or bubble, China's EV outbreak is perfectly embodied by one wannabe, Byton.

The aspiring brand was founded only last September. It hasn't sold a single vehicle, and it is still building its first factory, on a muddy field here just northwest of Shanghai. But Byton plans to start selling a high-tech EV crossover in China late next year and, in 2020, ship it stateside.

That vehicle, to be called the M-Byte, is envisaged as a smartphone on wheels.

Concepts are replete with a mammoth dash monitor — more than 4 feet wide and 10 inches high — navigated by gesture control. The battery, offered in two sizes, will deliver a driving range up to 329 miles. And, to boot, it will sticker for a modest $45,000.

If that all sounds too good to be true, executives hope to have their Nanjing factory ramped to peak production of 300,000 vehicles within five years. Oh, and that output will span at least two nameplates — including an upcoming K-Byte sedan with Level 4 autonomous driving ability.

What makes CEO Carsten Breitfeld, a former BMW Group vice president, think he has any chance in pulling it off? In a word, China.

"What we do here, to be honest, is nearly impossible," Breitfeld said at the June opening of Byton's headquarters here. "The only place in the world you can make it is China."

Indeed, China has emerged as a global incubator for next-generation electrified driving and a potent Silicon Valley rival. The roster of upstarts is long and growing. Beyond Byton, there is Nio, Singulato Motors, Xiaopeng Motors (commonly known as Xpeng) and Weltmeister (also known as WM Motor). Each is virtually unknown overseas; each aspires to be the next Tesla.

Byton's founder and co-chairman, Feng Changge, is a Chinese auto dealer who was inspired to start making cars for himself after a one-hour sit-down with Tesla CEO Elon Musk.

Feng is a poster child for the zeitgeist sweeping the nation. "Every startup story begins with a dream," he said. "This is an era of heroes. Big or small, we all have a dream to become a hero."

But survival, let alone hero status, is still a long shot for most of these startups. The field is crowded, and the technology is still in its infancy. Moreover, the growing pains for Tesla, which is still struggling with mass production and has yet to book an annual profit, are sober warnings of the hurdles ahead.

China's rules

Making it or faking it?
China has a fast-growing field of EV hopefuls. Here's a look at some of them.
  • Nio
  • Vehicle: ES8 crossover
  • On sale: Delivering initial run of 10,000 Founders Edition units in China
  • Tech: 70-kWh battery, cells by CATL
  • Range: 221 miles
  • Price: $65,000-$79,500
  • Production: Outsourced to JAC
  • WM Motor
  • Vehicle: EX5 crossover
  • On sale: September in China
  • Tech: 46-kWh, 53-kWh and 57-kWh batteries, cells by Godsend Power and CATL
  • Range: 186-286 miles
  • Price: $26,100-$32,600
  • Production: Factory in Wenzhou with 100,000 capacity
  • Singulato
  • Vehicle: iS6 crossover
  • On sale: Fall in China, then other countries
  • Tech: 80-kWh battery, cells by Panasonic
  • Range: 249 miles
  • Price: $29,000-$43,500
  • Production: Outsourced to BAIC at first, but 2 factories in Anhui and Jiangsu provinces to open by 2020
  • Xpeng
  • Vehicle: G3 crossover
  • On sale: End of 2018 in China
  • Tech: 44-kWh battery, cells by Sunwoda
  • Range: 199 miles
  • Price: $29,000-$40,600
  • Production: Outsourced to Haima initially, later switching to own plant in Zhaoqing with 100,000 capacity
  • Leap
  • Vehicle: S01 four-seat sporty coupe
  • On sale: First half of 2019 in China
  • Tech: 140-kWh battery, cells by Panasonic and BAK Group
  • Range: 224 miles
  • Price: $21,800-$29,000
  • Production: Building factory in Jinhua that targets 200,000 capacity
  • Byton
  • Vehicle: M-Byte crossover
  • On sale: Late 2019 in China, 2020 in the U.S.
  • Tech: 71-kWh and 95-kWh batteries, cells by CATL
  • Range: 249-329 miles
  • Price: About $45,000
  • Production: Building factory in Nanjing with 300,000 capacity
Sources: Companies

China already is the world's biggest EV market. Sales soared 96 percent to 313,000 vehicles in the first half of this year, according to the China Association of Automobile Manufacturers. But some 110 EV makers are chasing that pie, and most, like Byton, have yet to sell a single vehicle. Many industry watchers warn the bubble is bound to burst.

"Most of them won't happen," James O'Neill, managing director of advisory bank JFP Holdings, in Beijing, told Automotive News. "These guys are jumping in on the fly, saying EVs are the next big thing. But a lot of them are going to get to a point where they say, 'This is a lot more difficult than I thought.' "

China plays by its own rules. Beijing is fixated on EVs as a crucial next-generation technology China must dominate.

Its authoritarian government has an action plan called Made in China 2025 that spells out that ambition and calls for China to lead in autonomous driving and artificial intelligence.

By 2022, Beijing wants annual production of new-energy vehicles to reach 2 million units. The category includes plug-in hybrids and green alternatives such as fuel cell vehicles, but in practice, it means mostly battery-powered full electrics.

Such top-down policies make EVs must-haves for old-guard manufacturers, but they also entice new players such as Byton into the game. A California-style carbon trade program, for example, begins next year and adopts more stringent requirements in 2020. EVs get the most generous credits — the longer their range, the more points they generate for their manufacturer.

China further stokes EV sales with subsidies of up to 67,500 yuan ($9,800) per vehicle and other gimmicks, such as special allowances for limited license-plate registrations in big cities.

Byton's Feng Changge went from dealer to EV maker.

Local governments compete for factories and jobs by doling out sweetheart loans.

"Investors think, 'The government wants this to happen, and that's a green light for us to go in with these huge investments,' " said Michael Dunne, CEO of ZoZo Go, an investment advisory firm focused on China's autonomous and EV markets. "With that government backing, you have a willingness to stay in the game as long as it takes to succeed and thrive."

The speed, zeal and ease with which China is attacking the future has traditional metal benders from Tokyo to Detroit to Wolfsburg looking over their shoulders.

"The shift toward new-energy vehicles, as a result of the strengthening NEV policies, has given China the momentum to overtake other countries," Kazuhiro Kobayashi, Toyota's head of China operations, warned at this year's Beijing auto show. "What impresses me the most is the sense of speed."

Breitfeld: "Nearly impossible" task

To understand how China does it, take a closer look at Byton.

Feng found his EV inspiration only in 2014. As chairman of Harmony Group, one of China's largest luxury-brand auto retailers, he had just begun collaborating with Tesla in aftersales.

"Tesla," he said, "made me realize the auto sector would experience a revolution."

Feng wanted to play a part and soon began assembling what are known in China as the "four haves": capital, technology, product and factory. They are considered the keys to success.

A scant four years later, he is nearly there.

Capital

In the beginning, Feng took the natural approach for China. He partnered with two of its biggest tech moguls: Tencent Chairman Ma Huateng and Terry Gou, chairman of Foxconn, the electronics giant best known for assembling the Apple iPhone.

They began recruiting talent and aimed high.

Byton's factory in Nanjing, China, is under construction, above, but the startup plans to start selling its M-Byte in China late next year. The interior, left, boasts a 4-foot-wide monitor.

In their sights was the BMW team that engineered the i series of electrified vehicles, including the i3 and i8. They poached Breitfeld, a German mechanical engineer who was head of i8 development. Other BMW colleagues soon followed.

But they joined with a caveat. The foreign managers wanted unencumbered control, without the interference of big external investors tied to Tencent and Foxconn. So Byton turned to traditional capital markets and more hands-off investors.

As of June, the haul from those funding sources, including a large state-owned automaker and the world's largest producer of lithium ion batteries for vehicles, totaled around $800 million, Breitfeld said. That's not a lot by global standards; it's less than Toyota's annual r&d budget.

But the secret sauce in China is sometimes unseen. Government assistance rang up to the tune of $800 million, Breitfeld said, including subsidies and guaranteed loans from Nanjing to build the plant. Byton doesn't have to repay the loan until it turns profitable, and its own investment amounts to less than 20 percent of the plant's cost, Breitfeld estimated.

"It's basically taking the risk completely away from us," Breitfeld said.

Technology

Breitfeld and his international team of engineers, designers and production specialists seek to channel their wealth of expertise into cutting-edge technology, not just another car.

Some 300 of the company's 700 employees are in Santa Clara, Calif., working on the advanced electronics Byton hopes will set its cars apart. Another 80 are in Munich, focused on design.

The world headquarters in Nanjing exudes a Silicon Valley vibe, with exposed concrete ceilings, trendy open seating and soothing walls of leafy plants. Breitfeld wants to expand the global head count to 1,200 by year end.

Byton's cars make a hard sell on technology, from the expansive display panels — as wide as the entire car — to the tablet embedded in the steering wheel.

That's a top strategy for all of China's EV startups. They position themselves as a new breed born from the convergence of old-school automakers and futuristic tech companies.

"You can't call them startups anymore because they are too big. I call them emerging auto-tech companies," said Zhou Lei, a partner and auto analyst at Monitor Deloitte. "Investors in China have changed their focus from traditional, labor-intensive industries to those with new-technology elements that capture the eyes of China's growing high-end consumers."

To keep costs down, Byton wants to get by with fewer prototypes, such as these M-Byte crossovers, by doing detailed teardowns of the ones it does build.

Byton's very name seeks to telegraph technology. It is short for "bytes on wheels," a nod to its ambition of developing an automobile that is a next-generation smart device.

Global design chief Benoit Jacob, another BMW defector who worked on the i program, says Byton's styling must exude this high-tech aura at first glance. The K-Byte sedan concept, for instance, has a slender module that houses lidar sensors along the spine of the roof. Other lidar sensors pop out under the sideview mirrors and retract when the car isn't in autonomous mode.

"We have to show digital power," Jacob said of Byton's design language, which he calls New Semantics. "We don't want to hide our technology. We want to celebrate it."

Product

Byton's planned crossover and sedan will use the same platform and electric powertrain, and the batteries will come in two variants.

The base model M-Byte crossover gets a 71-kilowatt-hour battery with a 249-mile range; a more powerful 95-kWh battery option will achieve 329 miles. The K-Byte sedan will use the same batteries but have a longer range because of better aerodynamics and a lighter weight, Breitfeld said.

Byton plans to start rolling out autonomous K-Byte prototypes as early as this year, with an eye toward making Level 4 vehicles ready for commercialization around the end of 2020 or early 2021. Customers will be able to use that hands-off driving feature only in limited areas that support it, Breitfeld said.

Byton sees a crossover as key to a strong launch because consumers are flocking to the segment, not only in the U.S., but in China.

Crossovers are the leadoff products for a host of EV newcomers, including Singulato, WM Motor, Xpeng and Nio. Many are due this year. Pricing is expected to run the gamut, but most, like Byton, are seeking to undercut Tesla's Model X with sticker prices less than $50,000.

"If you want to be successful," Breitfeld said, "you need to have an affordable product."

Byton seeks to contain cost partly by adopting a direct-to-consumer retail model similar to Tesla's. Breitfeld says Byton can trim costs by up to 20 percent that way.

In the U.S., dealers would be used as agents who connect customers to Byton but don't actually hold inventory, said Henrik Wenders, another BMW i veteran who now leads global marketing at Byton. Buyers' contracts would be with Byton, not the dealer.

In China, Byton plans to open up to 30 brand stores by year end.

From top: Singulato iS6 crossover, Leap S01 sporty coupe and Nio ES8 crossover

Factory

Before selling any cars, Byton must make them. And here's where things get tricky.

As of June, a prototype trial workshop was the only building at the site of Byton's future assembly plant in a sprawling industrial park on the outskirts of Nanjing. About two dozen vehicle bodies occupied the sparkling premises, but workers had built just three complete prototypes. Those were heading to crash tests.

Before starting production next year, Byton plans to build just 200 crossovers for validation and other prototype testing, a mere handful compared with the way old-school players operate.

"We don't want to build thousands of cars, because it's way too expensive," said Mark Duchesne, Byton's global production chief. He spent five years leading various manufacturing divisions at Tesla and, before that, nearly two decades setting up factories at Toyota.

"It's one way we can keep costs down," Duchesne said, adding that Byton wants to get by with fewer prototypes by doing detailed teardowns of the ones it does build. "That allows us to really condense our time schedules."

Faraday Future's cash crunch offers a cautionary tale. It still wants to start delivery of the FF 91 in December.

Byton plans to shave time by doing trial production in the prototype workshop, then hit the ground running when the assembly plant opens.

"If we had all the time in the world, we'd clean the building, have an opening party, and then move in the equipment," Duchesne said. "We don't have the luxury of that time."

The vision may sound risky to anyone familiar with Tesla's troubled ramp-up of its mass-market Model 3 sedan. Tesla repeatedly has fallen short of its production goals and jury-rigged an auxiliary assembly line outside, under a large tent, to boost output.

Duchesne said Byton can avoid such pitfalls. Its plan is to take advantage of China's plentiful, affordable labor and resist the temptation to use robots in every corner of the factory.

"We won't be doing what Tesla is doing," said Duchesne, who has set up seven factories in five countries during his career. "They had a vision of machines building the machine. We'll be very conventional. We'll use people where it makes sense."

If everything goes smoothly, Byton wants to make 5,000 vehicles next year, 65,000 in 2020 and 300,000 a mere three years after that.

"Our schedule is aggressive, but I've worked on more aggressive schedules," Duchesne said. "Preparation is everything. Our strategy is to prepare and over-prepare."

Reality check

In China, there is a derogatory term for slick startups that materialize overnight and dazzle with lofty visions and charismatic leaders. They are called "PPT companies," a play on the PowerPoint plans their leaders are fond of presenting but usually fail to deliver.

Breitfeld insists Byton is different.

But there are no shortcuts to tedious product validation and regulatory approval. Faraday Future is one cautionary tale.

Its parent company, LeEco, was a video-streaming website in Beijing that eventually expanded into filmmaking, TV manufacturing, mobile phones, broadcast sports programs and even ride-hailing. But founder Jia Yueting bet all that on breaking into EVs.

The struggling EV contender still wants to start delivery of its FF 91 luxury electric crossover in December. But it has been a bumpy, circuitous road.

Faraday Future initially planned to build the vehicle, purported to have a three-second 0-to-60-mph time and 300-mile range, at a $1 billion assembly plant near Las Vegas.

It was forced to scrap that plan amid a crippling cash crunch. Facing angry creditors back home, Jia reportedly defied orders by Chinese regulators this year to return and sort out the mounting debts.

Instead, he camped out stateside, in a kind of self-imposed exile, to feverishly raise more money. He eventually did. But the chastened Faraday Future downsized its ambitions and opted to build the FF 91 at a refurbished former Pirelli tire factory in central California.

On July 30, Faraday Future said it had completed its first body-in-white for the FF 91.

Even that modest achievement is miles ahead of most aspiring competitors from China. Analysts caution that it is too early to say which startups are making it and which are faking it.

"Some of these entrepreneurs really want to do something. Some of them just want to tell stories," said Yale Zhang, managing director of Automotive Foresight, a consultancy in Shanghai. "Even if the company fails, the founder can still come away with a lot of money."

Zhang is among those expecting an industry shakeout.

The ranks of EV players could thin as early as 2020, he said, when Beijing starts pulling the plug on its generous EV subsidies. At the same time, the threat of U.S. tariffs looms over hopefuls such as Byton that are counting on exports to buttress the business.

But those that survive still will be able to tap a vast pool of young, wealthy customers salivating for something fresh. EV optimists say capturing just a sliver of the biggest and fastest-growing auto market on earth guarantees handsome returns.

Leon Li, 39, is among the cult of true believers wholly sold on China's EV vision.

The management consultant from Beijing is among the 1,000 EV acolytes who plunked down a $260 deposit to preorder the Byton M-Byte due next year. Li wants to trade his 10-year-old Mazda6 sedan for a high-tech wonder with all the flair of a Tesla but a more attainable price.

He likes Byton for its sweeping dashboard video display, which he called "absolutely dazzling."

"I'm looking for something with a soul," Li said at the glitzy unveiling of the K-Byte sedan concept in Shanghai, "and Byton definitely has soul. I think Byton is redefining the car."

Yang Jian contributed to this report.

You can reach Hans Greimel at hgreimel@crain.com -- Follow Hans on Twitter: @hansgreimel

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