GUANGZHOU, China (Reuters) - After paying out billions of dollars in subsidies to promote greener cars - and creating a gold-rush among unknown start-ups - China is tightening its grip on the world's biggest electric vehicle (EV) market to weed out weaker domestic firms.
But some leading local EV makers are, for now, ignoring calls to apply for costly manufacturing licenses, preferring to invest in design and technology innovation.
That, analysts warn, could prove costly down the road if they fail to secure permits to make and sell their new cars.
China has rapidly built the world's largest EV market, throwing money - subsidies of $4.5 billion (3.63 billion pounds) last year alone - at a sector it hopes will lower fuel imports, improve big city air quality and create technological champions.
Subsidies, paid to the manufacturer for each car sold, can be worth more than a third of the sticker price of a model like BYD's e6. Subsidies are due to be phased out over the next few years.
Automakers have responded with a slew of electric cars, with more models to come from SAIC Motor and Chongqing Changan Automobile at the Guangzhou auto show, which opens on Friday, while General Motors is set to unveil a concept car previewing its new-energy plans at the event.
Beyond the traditional automakers, Beijing opened the sector to investment by technology firms and others. EV start-ups such as LeEco, Future Mobility and WM Motors have raised hundreds of millions of dollars to develop green car technology.
Sales of new-energy vehicles (NEVs) in China - including all-electric and plug-in hybrid models - totaled 337,000 in January-October, up sharply from last year, but still some way short of China's target to have 5 million NEVs on its roads by 2020.
In recent months, authorities have cracked down on firms making substandard products and gaming the subsidy schemes through phantom car sales. State support has been tightened and there are new rules for companies applying for a license to make all-electric cars.
These include intellectual property rights; research and development; sales and after-sales support plans; trial production of at least 15 cars; and more. Separately, new safety rules for NEVs, such as battery testing, will make life tougher for weaker firms.
Since March, just a handful of companies, all auto industry veterans including those with ties to BAIC Motor and Chery [CHERY.UL], have been granted licenses - around a quarter of the total applications, auto executives say.
The National Development and Reform Commission (NDRC), which approves the licenses, could not be reached for comment. The Ministry of Industry and Information Technology did not respond to requests for comment.
Some of the leading tech and start-up companies, including those backed by Tencent and Foxconn, are holding off from applying, saying they are either still some way from actually making cars or expect the rules to change.
Jack Cheng, head of manufacturing at NextEV, which is backed by Tencent and Hillhouse Capital, said the company would apply for a license - but only after it makes its first car, delaying investing directly in manufacturing and instead teaming up with traditional automaker Anhui Jianghuai Automobile (JAC).
"We don't really want to spend too much money on manufacturing, to be honest, and the government policy might change," Cheng told Reuters.
Wang Chao, chairman of EV start-up Kaiyun Motors, said that instead of pitching directly for a license, he preferred to buy a struggling petrol car maker whose license can also be used to make electric vehicles. That 'grandfathering' process allows firms to produce cars in existing factories, though they would need permission for any new plant.
"You can spend tens of millions and get a license, but all you get is a license. If you buy a company, you also get a factory," Wang said.
Start-ups are taking a gamble by not getting a license now, says Yale Zhang, Shanghai-based managing director of consultancy Automotive Foresight.
An NDRC license will be a likely prerequisite for selling an electric car, and the public security bureau, which issues car license plates, is unlikely to give out plates for cars made by companies with no central approval.
"The best thing for them is to secure a license, otherwise there might be some problems," Zhang said.
The state-backed China Association of Automobile Manufacturers (CAAM) has said the new rules should lead to a more sustainable EV sector. "It will affect the market's short-term development, but in the long-term will lead to better quality and more cost effective development," Shi Jianhua, a CAAM deputy secretary, said last month.
Zhang at Automotive Foresight estimates companies need to have least 3 billion yuan ($438 million) to meet the new R&D, sales and plant standards.
While several start-ups have the funding, they are reluctant to fork out on license applications now, though several said it was inevitable.
For example, Cheng at NextEV - which aims to have raised 20 billion yuan ($2.9 billion) at home and abroad by the year-end - said he'd rather spend on developing technology. NextEV will pay contract manufacturer JAC for each car produced, though Cheng foresees the relationship going deeper in future.
As China winnows down the number of firms racing to produce clean, smart, internet-connected cars, auto executives are calling an end to the recent boom.
"This is the golden era. In two or three years, you won't be able to start a new company," said Wang of Kaiyun Motors.
"There are over 20 (electric passenger car) companies. Most will put out one model, maybe not even that, and disappear," he said, predicting only a handful will survive in the long run.
Reporting by Jake Spring, with additional reporting by Cheng Fang and BEIJING Newsroom; Editing by Clara Ferreira-Marques and Ian Geoghegan