China's EV manufacturers face their ‘Evergrande moment'

Business Times

03-06-2025

YOU know that things have reached an inflection point when China's People's Daily newspaper warns against 'involution' in an industry, noting that firms and factories have been racing to produce the same products and barely making a profit. In this case, the warning was aimed at the 100 or so electric vehicle (EV) makers. That number is, by any measure, way more that any car market, even one as big as China's, can sustain.
Evidence that the nation's car market remains oversupplied has been mounting in recent years. As recently as five years ago, there were about 500 firms producing EVs. That their numbers have declined so dramatically provides a useful metric about brutal market conditions.
Indeed, one industry executive spoke of an industrial 'elimination round' taking place over the next two years. A few days later, the chairman of Great Wall Motor, Wei Jianjun, was quoted as saying that China's EV industry is experiencing its own 'Evergrande moment', referencing the collapse of the country's most indebted property developer last year.
The fear among carmakers (and economists) is that, as it was with the crash of China's property giants, cascading bankruptcies in the EV industry will spread misery not just throughout the automotive sector as suppliers and dealers go under, but, eventually, the wider economy will feel the chill.
However, from a macroeconomic perspective, everything is going well. Cut-throat competition is driving efficiency and innovation. For instance, BYD, one of the three car firms actually making some profit, is furiously trying for a breakthrough in autonomous driving with its so-called God's Eye technology. Tesla, which has a big presence in China, says it will unveil its self-driving robotaxis on Jun 12. These vehicles are reported to be undergoing trials in Austin, Texas. Then again, robotaxis were first promised in 2016.
It should be noted at this juncture that the consolidation in China's automotive sector hews to a familiar script. That is the way Beijing's industrial policies play out. Subsidies and policy support are bestowed on favoured industry players until they reach a certain size, and when they are deemed ready to compete with anyone in the world.
Beijing then stands back and allows the market to sort out the winners from the losers. We have seen how this approach worked with solar panel manufacturers. It is harsh and unforgiving, but it is certainly far better than the system of continual state support for ailing zombie firms, which has now become almost routine in the West.
That said, it should be noted that there are some 3.5 million EVs piling up as unsold stock in China, despite incentives Beijing has offered to encourage owners of combustion-engine vehicles to trade them in for EVs. Prices are being cut. One BYD sedan is selling for as little as 69,800 yuan (S$12,487). More significantly, China's top carmakers are still only operating at half capacity. Expect a push to export the surplus.
In Asean, Thailand, Indonesia and Malaysia have their own automotive industries. How will they react if a tsunami of cheap, but technically superior, cars swept into their markets? The instinct may be to erect tariffs walls and subsidies, to protect the local industrial base and the supply chains and, above all, jobs. The better option might be to invite the best of China's car producers to set up factories locally and let the market decide the winners.