Auto Industry

Fight or flight

China’s electric vehicle brands in a battle to survive subsidy squeeze


Zotye Automobile made a Rmb290 million loss in the first half

“He was too emotionally invested to not fight for the project until the last,” wrote Wired magazine of Sir James Dyson’s £2.5 billion ($3.15 billion) ambition to take on the likes of Tesla in the electric car industry.

The dream – supposedly seeded by the rejection of his cyclonic exhaust by the car industry in the early 1990s (long before his bagless vacuum cleaner became a global hit) – came to an end on October 10. In a letter to employees, Dyson said that his company “simply cannot make it [Dyson’s electric car] commercially viable” and that no buyers had been found to take the project further – in spite of a driveable prototype of its first electric vehicle having already been built and the land for an assembly facility secured in Singapore (see WiC430).

From initial excitement to rude awakening, Dyson soon grasped that competing in the crowded EV market burns a barrel-load of cash. Meanwhile the British inventor’s bad experience is not an isolated case: in China a host of EV player are also having a bruising time. Analysts predict that as many as 80% of the estimated 486 players in the world’s largest EV market will, like Dyson, pull out. That’s because by the end of 2020 the Chinese government plans to phase out its subsidy programme for new energy vehicles (NEVs) – a sector that encompasses hybrids, fuel-cell and all electric cars.

The shelving of an EV trade show in Shanghai recently speaks volumes about the unravelling of the industry. According to 21CN Business Herald, the event was pushed back to August 2020 after a swathe of exhibitors bailed out, some blaming marketing budget squeezes, others admitting that their businesses were going under amid slackening demand.

“We’ve never postponed any trade shows before,” an organiser told the Guangzhou-based newspaper, noting that other expos have also been affected by the downturn.

Zhejiang-based Zotye Automobile, a partner of Ford in China and one of the participants scheduled to be involved in the Shanghai trade show is one of the companies battling to survive the treacherous conditions. It recorded a Rmb290 million ($40.85 million) net loss in the first half as sales in the first eight months skidded 32% on the year. Further financial troubles surfaced this week when a supplier revealed that it had filed a civil suit with a court in Hangzhou for breach of contract over outstanding payments and was seeking to freezemore than Rmb40 million of the group’s assets. Although Zotye managed to secure credit lines of Rmb3 billion from various banks in August, it is planning to stop producing EVs, National Business Daily reported, citing Zotye’s suppliers.

Beijing-based Hawtai Motor is another firm in a financial bind. Against just Rmb130,000 of cash on its books, its debts had ballooned to Rmb29.4 billion as of March, with the majority of its shares already pledged or frozen, and production suspended at all four of its manufacturing plants.

Failing to pay wages to employees and settle payments of as little as Rmb13,000, Hawtai had accumulated 127 credit offence records as of September, according to the National Public Credit Information Centre, which put the company on its government-endorsed blacklist for ‘dishonest entities’.

The market conditions are fuelling speculation that several players will be in bankruptcy proceedings by the end of the year, souring Rmb50 billion worth of loans in the banking sector as the domino effect ripples across the automotive supply chain.

For a lot of the manufacturers, their struggles stem from new government policies that are squeezing them on both the income and expenses fronts.

Since the first round of purchase subsidy pullbacks in June – which were supposed to spur the industry to stand on its own feet rather than rely on state handouts – EV sales have been dropping. Last year saw a 62% jump in annual sales, following a 51% surge the year before. But EV sales in July and August dropped 4.7% and 16%, respectively, from a year earlier. September was worse, logging a 34% year-on-year plunge to 80,000 units, according to the China Association of Automobile Manufacturers.

The trend bears a growing resemblance to car sales in general, which have been falling for the last 16 months, except for a blip in June (see WiC460). Exacerbating the crunch for those manufacturers that also make cars with gasoline engines is the carbon credit trading scheme introduced this year, which obliges those that fail to generate 10% of their annual sales from NEVs to buy extra quota from peers that meet the target (see WiC462).

Another draft measure being discussed would only allow firms that have invested Rmb4 billion or more in research and development over the previous three years to farm out their manufacturing – a common business model among domestic EV players in China (see WiC438). That would force companies to spend more on technology upgrades or give up on production altogether.

In the meantime frequent fundraisings are the only means of survival for the fledgling players trying to get a toehold. Going public in New York last September, Shanghai-based NIO last month raised $200 million from its own chief executive William Li and one of its biggest shareholders, Tencent, after seeing its cumulative losses widen to $5.7 billion as of June. The looming cash crunch also thwarted a plan to build its own factory in Shanghai and caused a sell-off in its shares that has wiped out 86% of its market value since its IPO.

The situation is fraught at the closely-held Faraday Future too, which has been scouting around for last-minute backers to avoid liquidation since 2017. Its founder Jia Yueting, who has defied an order from the country’s stock market regulator to return to China (see WiC392), finally filed for Chapter 11 bankruptcy with a court in Delaware on Monday. Yet his plan to repay $3.6 billion worth of debt through a creditor trust is dependent on Faraday Future pursuing a successful IPO – a bet that looks questionable given the souring of the sector.

At the other end of the spectrum, better capitalised players are trying to gear up for the EV race through reorganisations. A case in point is Geely, which is merging its combustion engine operations with those of Volvo (a brand that Geely acquired in 2010). Combining resources will free up Volvo to focus on electric powertrains in-house without starving its traditional engine business of resources, Volvo’s boss told Bloomberg.

A few of the homegrown EV manufacturers have reported better news. A press release from WM Motor last Wednesday celebrated the one-year anniversary of its EX5, a pure electric SUV, saying it had delivered 16,000 of the model, making it the fastest-selling “pure electric A-class SUV in China”. Earlier this year WM offered lifetime warranty on its battery packs, which it claims was a world first. Its boss Freeman Shen told WiC in April that he expected his firm to be a beneficiary of the subsidy cuts and the EV shakeout to come (see WiC447).

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.