China has recorded its highest level of fundraising in the automotive sector in the year to date (YTD), topping the world rankings, driven by a raft of innovative Chinese electric vehicle (EV) manufacturers seeking to boost their financial firepower to challenge more established carmakers.

Funding deals raced to USD 1.24bn, rising 47.3% year-on-year (YoY), largely thanks to CNY 8bn (USD 1.1bn) raised by IM Motors in a Series B round led by Zhongyin Assets Management, ABC Financial Asset Investment and Lingang Group.

The value of this transaction surpassed the largest funding deal in the auto sector in China last year – crossover financing worth CNY 7bn raised by fellow EV maker Hozon New Energy Auto in August.

While total M&A deal volume in the country’s automotive sector has slowed 78.4% YoY to USD 2bn, it remains the world’s second-largest level, trailing in the rear-view mirror of only the US.

However, the urgent need for consolidation within China’s auto industry and attempts by domestic EV makers to ‘recouple’ with the West by striking deals with their US and European counterparts could speed up dealmaking activity over the rest of the year.

Cut-throat competition

China, the largest car market in the world, recorded sales of 7.7 million electric cars, including plug-in hybrids, in 2023, up 35% compared with 2022. In contrast, the US market remains small, with sales last year reaching 1.5 million.

Chinese manufacturers have the advantage of vertical integration, producing most components in-house and keeping costs low. Chinese Premier Li Qiang vowed to “consolidate and enhance” the country’s leading position in the intelligent connected new-energy vehicle (NEV) industry.

However, the Chinese market is also an extremely competitive one.

While Chinese EV makers outperform Western rivals in terms of technology and affordability, the sector has too many players and is plagued by overcapacity. Last month, premium EV maker Human Horizons’ HiPhi brand halted production, marking a further deterioration in operations.

Li Xiang, CEO of EV startup Li Auto, urges China to establish an “M&A system” for vehicle makers to pool resources, prevent individual marques from going bust, combat the problem of surplus capacity and lower social tolls resulting from shutting down businesses outright.

Fifteen EV startups, including WM Motor, Enovate Motors, Singulato and Aiways, have filed for bankruptcy recently or are stuck in a financial crisis, according to Yicai Research. A slowdown in demand for electric cars is also expected to affect upstream supply chains.

This year, the Chinese market for EV batteries will undergo a reduction in inventory, as demand for EVs cools and overcapacity exacerbates a price war, resulting in losses for companies involved in the lithium-ion battery supply chain.

Conscious ‘recoupling’

The ability to expand abroad – above all into Western markets – is likely to be key for Chinese electric carmakers to stay the course in this survival-of-the-fittest contest.

To that end, Chinese players are seeking to ‘recouple’ with the West through M&A deals with US and European Union (EU) peers. These transactions enable Chinese carmakers to raise capital and have better odds of overcoming ongoing or upcoming tariffs and bans imposed by the US and EU.

At the same time, Western carmakers are realizing the advantages of working with Chinese solutions – accelerated development of new cars and significant cost reductions. Volkswagen’s partnership with Chinese rival Xpeng in a USD 682m equity tie-up and Stellantis’ USD 1.6bn investment in Chinese EV start-up Leapmotor are testament to this.

In addition, China’s tech giant Huawei reportedly asked Mercedes Benz and Volkswagen’s Audi, alongside Chinese EV makers, if they have any interest in buying minority stakes in its smart car software and components firm.

Chinese electric carmakers are having an easier time in challenging established brands such as Toyota and Ford in Australia, where a lack of local car manufacturing and absence of trade barriers make it an attractive market.

Yet, political pressure in other Western countries to scupper deals and collaboration between Chinese and Western automotive players is enormous. For example, US lawmakers opposed Ford’s EV battery plant in the US using technology from China’s CATL.

Meanwhile, planned Chinese EV manufacturing operations in Mexico and Hungary – key entry points for the US and EU markets – are coming under fire, as politicians step up threats of imposing tariffs, bans and outbound investment screenings against them.

by Riccardo Ghia with analytics by Manu Rajput