China’s EV Firms Are Losing Money, Living Off Government Support

Under global pressure, Beijing is pulling back from the EV project. The firms now rely on local government support, but it won’t sustain them for long.

Commentary

Some years ago, Beijing made a big bet on electric vehicles (EVs) with the goal of achieving global dominance. However, like so many other efforts in China’s centrally planned economy, things have not gone well.

Faced with intense price competition among China’s many EV producers, as well as waning demand, both in China and abroad, many EV manufacturers have run into financial trouble, with some reporting losses despite still considerable state support. Where Beijing has stepped away from the effort, local governments have stepped into the breach with subsidies to protect regional employment and the interests they established when Beijing was still pouring money into EVs. It is not a sustainable situation.

Beijing began this now untenable situation more than five years ago. According to the MIT Technology Review, Chinese authorities, to become globally dominant in EVs, offered Chinese buyers and producers a raft of subsidies, tax breaks, procurement contracts, and other more oblique incentives to ramp up production.

The push eventually created a market for 13.1 million vehicles that accounted for 60 percent of EV ownership globally. Beijing also pushed for global sales of Chinese-made EVs. That effort made little headway in the United States even before Washington began showing increased hostility toward China and Chinese products. The effort was successful in Europe.

Now, global sales seem set to decline. Washington has imposed tariffs on a number of Chinese products, including EVs and EV components, as well as Chinese-made batteries and parts. Washington’s moves changed little, of course, since Chinese EVs had made little to no headway in North America.

However, tariffs and general levels of hostility make it clear that Chinese EV producers have no hope of eventually making gains in the United States. Further squelching hopes for Chinese EV sales in America are the difficulties facing the EV efforts of domestic U.S. producers, except perhaps Tesla. Chinese sales would, in other words, have faced difficulties even in the absence of Washington’s hostility.

Meanwhile, Europe, where Chinese EV sales had been strong, has complained that China is dumping low-priced vehicles on their markets and, in the process, is stymying the development of independent European EV production. Accordingly, the European Union is ready to place tariffs of up to 45 percent on imports of Chinese EVs, squelching any hopes that Chinese producers can look to boost European sales any time soon.

Beijing, already stuck with other planning errors that have created overcapacities in other areas of China’s economy, has backed away from the EV push. Having poured the equivalent of some $230 billion in subsidies and other supports for the effort, Beijing has cut back nearly 66 percent from what it had offered the industry in 2018. Such an action would normally force a consolidation in the industry. Weaker, less efficient firms with poorer products would go out of business after a while, leaving others to find financial health at lower production levels. But that is not what is happening. Instead, local governments, many already in difficult financial straits, have kept afloat what are rapidly becoming zombie firms.

Some regions—Shanghai, Shenzhen, and Changping stand out—have begun offering Chinese EV buyers rebates ranging from 1,000 yuan to 10,000 yuan (about $141 to $1,415) a vehicle. Some localities are trying to support EV producers more directly. They claim to be doing this in order to retain and expand the high-income workforces associated with EV production. Some of the local governments have little choice.

In the salad days, when Beijing was giving the industry a lot of support, they found ways to involve themselves in the effort by investing directly in EV producers or taking out loans and issuing bonds on behalf of these manufacturers. The city of Hefei, for instance, invested some 5 billion yuan (about $707 million) into a regional EV producer, a division of NIO, Inc. That investment would go to zero if that division were to close.

This situation is untenable, to say the least. These local governments already face financial difficulties. They can barely afford to support unprofitable companies, especially since a global sales pickup is highly unlikely. Ultimately, the consolidation will occur, and private investors will face losses, as will local governments, even as they also lose the high-income workforces they strive to retain. China then will face another bump in the road to economic recovery.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

Source link