• A complex mix of ingredients came together to create China's electric vehicle boom, but government subsidies alone cannot explain the emergence of the industry's sophisticated ecosystem and vast manufacturing capacity.
• An alternate explanation is that Chinese carmakers could scale up and rapidly expand production of electric vehicles because they have access to the deep pools of flexible financing provided by capital markets, sovereign wealth funds, and private equity and venture capital investors, both in China and from overseas.
• China’s electric vehicle startups have raised billions from investors eager to finance potential unicorns in innovative, environmentally friendly industries. Taking inspiration from Tesla, Google, and other Silicon Valley pioneers, the founders of these startups have relied on rising valuations to attract new investment to sustain their operations despite years of losses.
• However, many of China's electric vehicle startups now find it hard to raise funds as their valuations have plummeted, and the market forces that drove the industry's breakneck growth may now be slowing it down.

A host of factors have enabled China’s emergence as a dominant force in electric vehicles, but a key ingredient in the industry’s breakneck development has not been fully appreciated: the availability of market-based financing that provides companies with the wherewithal to experiment, innovate, and expand without worrying about short-term profits.

Many of China’s electric vehicle startups have adopted the classic Silicon Valley model: begin by raising seed capital, go public to generate a large amount of liquidity, burn cash to scale up and claim market share, and depend on rising valuations to stay afloat. Expanding as rapidly and aggressively as possible is baked into the plan. When skeptics question this strategy, founders point to new economy giants like Airbnb, Amazon, Uber, and Zoom, all of which lost money for years before eventually emerging as market leaders.

Changing norms in the global financial system over the past thirty years have made it easier for new ventures to raise money based on potential future profitability, and startup culture has taken hold in markets all over the world. Reliant on a steady stream of new investors, disconnected from fundamentals, and in thrall to innovation and risk-taking, Silicon Valley–inspired business models have created vast wealth for some — but across a wide swath of industries, they have also led to price undercutting and excess production.

When bicycle sharing was introduced in China, the gain-market-share-at-all-costs mentality synonymous with Silicon Valley was the prevailing ethos of the entrepreneurs who jumped at the chance to enter a wide-open market. Barriers to entry were low, and the technology was simple and seductive: consumers paid their fees on a smartphone app and unlocked rental bikes with a QR code.

At one point there were more than 60 bicycle-sharing companies in China, and consumers were spoiled for choice. Bicycles could be rented for pennies or even for free as part of aggressive strategies to win customer loyalty; sidewalks were flooded with rental bikes as companies put as many on the streets as they could. No one was making a profit, and most companies quickly ran out of money. By 2020, only three survivors remained, including Mobike, which rebranded as Meituan after it was bailed out by Tencent-backed Meituan Dianping.¹

If all of China’s electric vehicle manufacturers were startups, then the market would eventually sort itself out as consumer preferences and financial realities divided the field into winners and losers. This is what happened with bicycle sharing. When the dust cleared, the last companies standing — those with the deepest pockets — had dominant positions in the market, if not a near-monopoly.

China has long been the world’s largest car market, but domestic demand for autos started to contract after 2017. However, sales of hybrids and electric vehicles began to take off in 2020, while sales of traditional internal combustion engine vehicles have continued to fall. In the first half of 2024, sales of electric vehicles made in China totaled just over four million units. BYD accounted for one-third of that total, with Geely and Tesla each accounting for around 7%, and the top ten companies collectively accounting for nearly 80%.² Currently, there are 26 mainstream domestic companies actively producing electric vehicles in China, and a dozen or so more that are joint ventures with foreign automakers.³

China’s ambitious campaign to put more electric vehicles on the road dates back to 2001, when the government began funding research into electric-powered cars. This effort gathered steam after 2008, the year Tesla introduced its first model and the Beijing Olympics focused the world’s attention on China’s epic pollution — and the government’s desperate efforts to clear the air in time for the games. Car ownership had risen dramatically over the previous decade, and by 2006, China had become the world’s leading producer of greenhouse gas emissions, of which autos contributed around 15%–20%.

Aside from near-apocalyptic air quality, another glaring consequence of the rise of car ownership was massive traffic congestion. To tackle both problems, local governments began restricting vehicular use in urban areas. Cars could only be driven on alternate days in Beijing and other large cities,⁴ and vehicles registered elsewhere could only enter the urban area with special permission. Many places severely restricted the number of license plates issued, divvying them out via a lottery system. This made it difficult for residents to buy their first car. On the secondary market, a license plate could be worth more than the automobile it was attached to.

In the mid-2010s, a series of measures supercharged the development of China’s electric vehicle ecosystem. Starting in select cities in 2016 and spreading across the country by 2018, electric vehicles could be registered and obtain a green-colored license plate immediately, bypassing the restrictions on gas-powered cars. This was a powerful incentive for consumers to buy an electric vehicle.

Around the same time, the government ramped up industrial policy support for the electric vehicle industry. A recent analysis found that sales tax exemptions accounted for most, if not all, of the increase over the past five years. Direct subsidies for research and development remained fairly constant, ranging between $3.4 billion and $4.3 billion from 2018 to 2023.⁵ In addition, central government rebates for electric vehicle purchases rose sharply over the course of a decade, reaching $9.2 billion in 2022, though that was the last year they were offered.⁶

Another momentous development that bolstered the case for China’s electric vehicle startups was the successful negotiation of the Paris Agreement at the 2015 United Nations Climate Change Conference and its ratification the following year. China was one of the first major countries to ratify the agreement, pledging to peak carbon dioxide emissions around 2030 and “make best efforts to peak early.”

With these factors in play, investing in China’s electric vehicle sector seemed like a slam dunk. China had been the world’s largest passenger car market since 2010, and the government was engaged in a sustained effort to transition away from gas-powered automobiles. Companies throughout the electric vehicle supply chain were courted by investors eager to place bets on potential unicorns. Startups raised billions from overseas capital markets, sovereign wealth funds, and global private equity giants. This funding has provided the resources and, more importantly, the financial flexibility to sustain their loss-making operations. Over the past decade, China’s electric vehicle startups have burned through huge piles of cash. High research and development costs, aggressive spending on sales and marketing, and price competition have put tremendous pressure on their margins. Nonetheless, China’s new electric vehicle entrepreneurs have found investors willing to keep the party going.

One of the most prominent advocates of this startup strategy is William Li, founder of the electric vehicle company Nio. Li has a long track record as a tech entrepreneur dating back to the 1990s. At the age of 25, he set up Bitauto, a website that brings together dealers and car buyers.⁷ Bitauto was listed on the New York Stock Exchange (NYSE) in 2010, and ten years later, it was taken private by a group of investors in a $1.1 billion deal led by Tencent, the Shenzhen-based internet giant behind WeChat and QQ.

If you look at the capital market in the United States, as long as there are investors to buy, you can go public… if a company loses money, like Amazon and Tesla, it is valuable if there are people to buy, and it can raise funds. This is different from China… This is a cultural difference. – William Li, Founder of Nio, 2018

Li leveraged his auto industry connections and personal wealth to set up his electric vehicle venture, and he raised billions of dollars by tapping investors who have a high tolerance for loss-making ventures and are eager to fund innovative, climate-friendly businesses. From its founding in 2014 through the end of 2023, Nio lost money at an astonishing rate, a total of more than $12 billion, and almost half of that in the last three years.⁸ But Li has been a master at extending Nio’s “runway” — the length of time until the company’s current funding is exhausted — by tapping into a wide range of sources to build a diversified capital base.⁹ This includes a heavy reliance on capital market transactions and other market-based financing, including funds provided by China’s leading tech companies, global and domestic private equity firms, and sovereign wealth funds.¹⁰

In September 2018, just three months after delivering its first car, Nio was listed on the NYSE, raising $1 billion.¹¹ This provided an exit for investors from earlier rounds as well as a platform for the company to raise money in the future, which would soon come in handy. By the end of 2019, Nio had sold almost 32,000 cars, but its cash reserves were depleting rapidly. Cash on hand had fallen from around $436 million at the end of 2018 to about $120 million at the end of 2019 — a year when the company’s monthly losses averaged over $130 million.

To extend Nio’s runway, Li turned to two sources: his investment bankers and the local government in Hefei, Anhui Province. During 2020, Nio’s secondary offering on the NYSE raised over $5 billion. And in February of that year, Nio received an injection of $1 billion from a group of state-backed investors, including two controlled by the city of Hefei. By the end of 2020, Nio was flush again, with over $5.8 billion in cash on hand.

In March 2022, Nio extended its capital market access by listing in both Hong Kong and Singapore. These listings were accomplished “by way of introduction,” meaning that no funds were raised at the time of listing.¹² Eighteen months later, Nio used its listed status in Hong Kong to issue $1 billion in convertible notes — debts that can be converted to equity at a later date — lengthening its runway at a time when the company was burning money at a rate of $230 million per month.

Nio’s largest influx of funds in 2023 came from CYVN Holdings, a sovereign investment fund controlled by the government of Abu Dhabi, which invested more than $3 billion. CYVN’s 20% stake in Nio is now larger than Li’s, but Li controls the company under a dual-class share arrangement that ensures he will maintain control even if his ownership is diluted.¹³ Once rare, these arrangements became popular in the United States during the 1990s tech boom.¹⁴ The ostensible aim is to shield the company from the short-term pressures of the market while allowing management to focus on growth in the early years when expenditures are high but steady revenue streams are yet to be established. Having a dual-class share arrangement can be a major advantage for a founder intent on spending whatever it takes to claim market share.

Another concern for founders of aggressive startups is that fixed asset depreciation can be a drag on a company’s valuation. Nio initially partnered with Anhui Jianghuai Automobile Group (JAC), a state-owned enterprise founded in 1964 that primarily manufactures heavy-duty trucks, to build its cars. However, Nio began to drift away from its “asset light” strategy when, in 2023, it acquired full ownership of the two plants that it had built jointly with JAC, each of which had a potential capacity of 300,000 units per year. A third Nio factory now under construction will have a capacity of 600,000, raising its total capacity to over 1.2 million units annually. This is over 1 million more than the 160,000 cars that the company sold in 2023.

As companies built new plants to meet the growing demand for electric vehicles, factories continued to manufacture traditional internal combustion engine vehicles.¹⁵ China’s auto industry can now produce nearly 60 million vehicles a year, including gas-powered, hybrid, and electric. However, about 40% of that capacity is not utilized.¹⁶ Overcapacity has plagued Chinese industries for decades. Bicycle sharing and the proliferation of food delivery apps are only the most recent tech-enabled examples, but excess capacity in basic industries, such as steel, has long been a source of friction with trade partners.

Underutilization will likely be a permanent feature of China’s auto industry. Local governments are keen to keep traditional auto plants going to generate revenue and employment, and many are just as eager to attract investment in cutting-edge industries on the electric vehicle value chain. The investors who have sunk billions into startups will be tempted to step in and bail them out when they run short of cash; and as the winners of the electric vehicle race earn more revenue, they will be able to invest more in expansion.

To sustain Nio’s operations and stay in the race, Li needs to attract new funds, but his ability to do so has depended on the company’s rising valuation. The company’s market capitalization reached its peak, just short of $100 billion, in January 2021. In comparison, the $6 billion in losses it had recorded up to that point seemed tolerable. But as of July 2024, Nio’s stock price has fallen more than 90%, and its market capitalization was below $10 billion, or less than its $12 billion in cumulative net losses to date. Fundraising has since slowed. Its most recent large investor was a Wuhan municipal government fund, which in May 2024 injected over $200 million into the Nio subsidiary that manages its battery charging service.¹⁷

Over the past two years, raising money has become more difficult for many other entrepreneurs as well. Economic growth has slowed, and investments in Chinese startups have dropped significantly across all sectors.¹⁸ China’s leading electric vehicle makers — most notably BYD, Geely, and Tesla — are deeply integrated into the global trading system and generate substantial cash flows, but many weaker players have already shut down or exited the market. The ones still struggling will try to stay afloat and stake out as much market share as possible. The survival of those that have yet to turn a profit will depend in large part on how investors gauge their future prospects. But China’s electric vehicle startups no longer look like a sure bet, and the market forces that helped create China’s electric vehicle juggernaut may now be slowing it down.

The author would like to thank the CCA team, particularly Jing Qian, Jennifer Choo, and Ian Lane Smith, as well as the peer reviewers who provided invaluable feedback. He would also like to thank his former colleagues at Harvard Business School who accompanied him on research visits to auto factories and dealerships around China in the early days of the electric vehicle era.

1. Li was an early investor in Mobike, and Mobike was an investor in Nio.
2. SAIC’s joint venture with GM and GAC placed fifth with a 5.4% market share. If including electric vehicles sold under its own mark and its separate joint ventures with Volkswagen and Buick, SAIC accounted for nearly 10%.
3. Press accounts typically overstate the number of active electric vehicle manufacturers in China, counting makers of golf carts and electric bicycles as well as aspirants that have yet to build a car.
4. Cars with odd-numbered and even-numbered plates could only be driven on alternate days.
5. Scott Kennedy, “The Chinese EV Dilemma: Subsidized Yet Striking,” Center for Strategic and International Studies, June 28, 2024, https://www.csis.org/blogs/trustee-china-hand/chinese-ev-dilemma-subsidized-yet-striking.
6. Some local governments introduced measures to replace the expiring central government consumer subsidies, with Shanghai offering a rebate for the purchase of new electric vehicles and Beijing providing a subsidy for trading in gasoline vehicles. Other provinces and cities offer cash-back incentives or shopping vouchers to boost sales.
7. The career of Xiang Li, the founder of Li Auto, followed a similar path: he dropped out of school and started an online marketplace for cars, Autohome, at the age of 18.
8. Nio incurred net losses of over $625 million in 2021, $2 billion in 2022, and $2.9 billion in 2023. Financial data sourced from Nio’s annual reports and converted to U.S. dollars at year-end published exchange rates.
9. Li also set up his own private equity fund, Nio Capital, which has raised more than $3 billion for investments in energy, mobility, and technology.
10. Investors in Nio’s first round of seed capital included Tencent, online retailer JD.com, the founder of smartphone maker Xiaomi, Li’s own Bitauto, and global private equity firm Hillhouse Investment. Sequoia Capital, a Silicon Valley–based venture capital firm specializing in tech startups, was also an early investor, along with a domestic venture capital firm, Joy Capital. In later rounds, Nio secured investments from Lenovo, the American private equity powerhouse TPG, and Temasek, Singapore’s sovereign wealth fund. Tencent has been a major backer through multiple rounds of financing.
11. Li had hoped to raise $1.8 billion.
12. At the time, Nio’s overseas listings were interpreted as a hedge against a possible delisting in the United States. A number of Chinese companies, including the last of the major U.S.-listed state-owned enterprises, voluntarily withdrew their listings in New York following the 2020 enactment of the Holding Foreign Companies Accountable Act, which required that companies be delisted if their auditors did not comply with U.S. accounting standards.
13. Dual-class share structures are also known as “weighted voting rights.”
14. Public companies in China are not permitted to use dual-class share arrangements; the stock exchanges in Singapore and Hong Kong began allowing them in 2018.
15. An SAIC Volkswagen plant closed in June 2023, but that was a rare case. Some traditional auto factories have been repurposed to make electric vehicles, as happened after Li Auto purchased a former Beijing Hyundai plant in 2021.
16. China’s cement industry faces a similar glut — the China Cement Association estimated that the sector’s capacity utilization rate was 59% in 2023. See David Perilli, “China to Cap Clinker Production Capacity,” Global Cement, June 12, 2024, https://www.globalcement.com/news/item/17474-china-to-cap-clinker-production-capacity.
17. Nio’s innovation — and unique selling point — is that owners can take their electric cars to designated stations where the battery is swapped out for a fresh one, eliminating the need to wait for a charge.
18. With deals drying up in China, tech industry investors and entrepreneurs are shifting their focus to startups overseas. See Li Yuan, “Can China Tech Find a Home in Silicon Valley?” New York Times, August 29, 2024, https://www.nytimes.com/2024/08/29/business/china-venture-capital.html.