China Moves to Stop a Crash in Booming Electric-Car Industry

As big as its world-leading car market is, China has decided that 486 aspiring electric-vehicle companies are too many.

The country is considering rules to raise the barrier to entry for electric-vehicle makers and nurture fewer but more competitive players, according to people familiar with the matter. Specifically, China plans to clamp down on EV startups who farm out their manufacturing, the people said, asking not to be named as the rules are still being drafted.

After hundreds of startups rushed into the electric-car business in the past decade, the government wants to prevent a crash akin to that of dot-com companies two decades ago. China’s electric-car makers have raised $18 billion since 2011, BloombergNEF estimates, but the market is in its infancy and foreign competition from the likes of Tesla Inc. is intensifying.

The new draft rules supplement regulations that took effect this month and only allow “eligible” companies to outsource production to other automakers. As of now, the regulations don’t spell out what “eligible” means.

According to the planned additions, new-energy vehicle makers that want to tap other companies’ production capacity need to have research-and-development investment in China of at least 4 billion yuan ($580 million) over the past three years, global sales of pure-electric passenger vehicles of at least 15,000 units over the past two years, and paid-in capital of potentially billions of yuan, they said.

The new rules also call for manufacturing contracts to run for at least three years with annual production of at least 50,000 units at one location, the people said. Startups will be allowed to sign manufacturing agreements with no more than two automakers, they said.

The regulations are still subject to changes, according to the people. The Ministry of Industry and Information Technology, in charge of drafting the new rules, said they are still being revised, without commenting on specifics. As a next step, the ministry will solicit views from the public, it said in an emailed response to questions.

Shares of some established EV makers rose. BAIC Motor Corp, the country’s biggest maker of pure electric cars, climbed by as much as 3.9 percent in Hong Kong Wednesday. Geely Automobile Holdings Ltd. advanced as much as 4.2 percent. NIO Inc., the leading electric car startup traded in U.S., rose 2.7 percent overnight in U.S. trading.

Outsourcing production has been a quick way for young electric-car companies to bring out their models while they plan for their own factories, which can cost hundreds of millions of dollars.

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