Zombie Hunting in China
The U.S. has three major carmakers with a global footprint, Japan around four and Europe a handful. Compare that with China, which -- while home to the world’s biggest car market right now -- has a boggling 846 registered auto manufacturers, most of them unrecognizable outside its borders.
More than 300 of those churn out new-energy cars, with everyone from smartphone makers to property developers piling in. One of the main reasons for this is Beijing, which has made dominating the brave new automotive era a top priority, a message heard loud and clear by the thousands of cities and provincial governments that implement policy throughout the vast country.
Officials have rolled out the red carpet (mostly in the form of tax breaks, subsidies and land grants) to companies with NEV-making ambitions. The eastern province of Zhejiang, for example -- home to Jack Ma’s Alibaba, and now an array of carmakers, from EV upstart Hozon to established player Geely -- will plow more than 300 billion yuan ($47 billion) into the sector by 2025. They’re betting the investment pays off in jobs and economic development, even though most of the new entrants are years away from turning a profit and probably wouldn’t survive without government backing.
Manufacturing plant for Zeekr, an EV unit of Zhejiang Geely, in Ningbo, China.
It’s a situation that’s only been fueled by investors’ embrace of the EV space. Shanghai-based electric carmaker Nio -- which targets a similar buyer to Tesla -- completed its New York initial public offering less than four years after it was started, the shortest timeframe of listed automakers globally, its founder William Li claimed in a speech this month. A surge of investment the past year has seen Nio and others like it, including Evergrande NEV -- the automotive arm of China’s most indebted property company, which is yet to make its own car -- now valued more than the likes of Renault and Nissan. Investors are being lured by a pandemic fixation on stocks that evoke a technology-disrupted future, along with estimates like this one from China’s State Council, that the NEV industry could generate 10 trillion yuan of revenue a year.
In two decades observing the Chinese auto industry, I’ve seen concerns around overcapacity and the need for consolidation surface a number of times. I remember back in 2014, traveling around the northeast, known for its state-run heavy industry, hunting for so-called zombie carmakers – companies that failed, but local authorities still refused to relinquish their valuable production licenses. Analysts have warned the Chinese EV bubble was ready to burst a number of times, most recently in 2019 when the stresses of carmaking (hugely capital intensive and margin thin) pushed the likes of Nio to the brink. It was saved -- fittingly -- by a 10-billion yuan lifeline from a municipal government.
But now, even some local authorities are sounding the alarm. Jiangsu province is an economic powerhouse on China’s eastern coast. Home to manufacturing facilities for EV startup Byton and Bordrin Motors -- both of which had to wind down or suspend operations last year as the virus rattled China’s economy -- Jiangsu said in February that its production capacity utilization rate, a good gauge of operating efficiency, had fallen to 33% in 2020, from 78% in 2016, and about 20 percentage points below the national average. With so many carmakers trying to compete in an increasingly competitive and maturing market, I have a feeling my zombie-hunting days may only be getting started.
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