Is China’s electric car dream turning into a zombie nightmare?
Rush to benefit from government subsidies spawned many small, ‘new-energy’ carmakers; few are expected to survive
The sprawling Suda Electric Car factory, in a wetland park beside the Yellow River in Sanmenxia, Henan province, is quiet.
The company, founded six years ago, had planned to be churning out 100,000 small and mid-sized battery-powered sedans a year by now – twice as many as Tesla produced last year – but only a few dozen workers can be seen at the factory, where a handful of finished sample cars sit on display stands in a corner.
That’s not much of a return for millions of yuan in provincial and city government assistance, but is symptomatic of the plight of many Chinese cities frantically searching for hi-tech white knights capable of rescuing local economies from collapse.
Since Suda’s inception in 2010, a year after the central government decided to shower “new-energy’ carmakers with fiscal subsidies, Henan’s provincial government has given the company at least 20 million yuan (HK$22.3 million) in research and development funding. Sanmenxia’s city government borrowed 100 million yuan to re-lend to the company, according to local media reports, and ordered utility companies to upgrade the electricity grid and install charging stations for a non-existent fleet of battery-powered cars.
The city government also gave Suda a prime location for its research centre and offices – in a wetland park that is home to thousands of migratory swans – and then took just 20 days to grant it another 47 hectares of land in the area for its production facilities. An additional 186 hectares of land has been earmarked for a car testing centre and logistics base.
The only activity to be found on a recent visit to the compound was in a “model” workshop, where a few dozen uniformed workers were manually welding and assembling car shells. One mopped the floor in front of a sign reading “no defective parts should be made, used or sold”.
The quiet compound is a reflection of the weakness of China’s state-led economic growth model. Competition among local governments for industrial projects previously helped spur growth – producing a US$10 trillion economy – but is now proving increasingly problematic as the job of picking winners becomes harder, with more and more resources sucked into investment black holes such as zombie companies and white elephant projects.
Suda is just one small fish in a feeding frenzy of home-grown electric carmakers spawned by Beijing’s decision in 2009 to encourage the production of alternatives to pollution-producing petrol-driven vehicles. Dozens electric car projects mushroomed almost overnight in the scramble for subsidy windfalls and China is now home to 169 officially registered makers of “new-energy” cars – those powered by electric batteries, hybrid engines or fuel cells.
Most only survive thanks to government subsidies. China accounted for half of the US$16 billion in subsidies countries offered to new-energy car makers in the past decade, and concerns that companies were lodging fraudulent subsidy claims led Beijing to set up a cross-ministry team earlier this year to examine sales figures from 2013 and 2014. The finance ministry says all such subsidies will be phased out by 2021.
Helped by more than 300 billion yuan in subsidies, and restrictions on the sale of petrol-powered cars in major cities, electric vehicle sales in China surged 343 per cent last year to 331,100 units – accounting for 60 per cent of the global total.
But media reports have cast doubt on the Chinese sales figures. State-run China Central Television reported in March that a company in Jiangsu province had falsely reported the number of vehicles it produced and sold in order to claim more in subsidies. One sales contract for 50 electric vehicles saw only seven actually delivered.
Established manufacturers such as Shenzhen-based BYD and Beijing Auto ranked among the world’s top 10 new-engergy carmakers by sales volume last year, but most of their would-be competitors in China are small and weak. Sales of BYD’s best-selling Tang model topped 22,000 in the first half of this year, according to data from the CleanTechnica website, but Chinese electric vehicle (EV) makers averaged sales of less than 2,000 units last year.
Yale Zhang, managing director of industry consultancy Automotive Foresight, warned that “many EV makers will fail sooner or later”.
“It’s an industry with meticulously high requirements, which many companies cannot meet with ease,” he said. “For Suda, the road ahead will even become thornier as there will be numerous national standards for it to meet.”
Zhang said local governments often threw their weight behind projects bearing fancy names such as “new energy” or “hi-tech”, knowing that was what Beijing wanted to hear, regardless of the market outlook.
“Local governments rolled out red carpets for electric carmakers a few years ago” by promising land and financing support, he said. “Local cadres are desperate to accumulate political capital from the new-energy sector to show they are responding Beijing’s call for a cleaner growth model. Unfortunately, most electric vehicle makers in China are doomed to fail.”
The local government in Sanmenxia, a city formed in the 1950s when the Communist Party’s grip on the Chinese economy was absolute, was more desperate than most to jump on the new-energy bandwagon because the gold, bauxite and coal mines that its economy depended on were running out of reserves.
Sanmenxia was named for the Yellow River’s three-gateway gorge – three routes along the roaring waterway formed by two large, rocky outcrops which local boatmen referred to as the gateways for men, gods and devils.
It came into being after the new communist regime, with support of the Soviet Union, decided to dam the Yellow River at the gorge. The dam, a concrete example of the party’s belief that man could conquer nature, did help to tame the Yellow River, but huge amounts of sediment settled in its reservoir, leading to flooding upstream and one of the most tragic mass migration stories in modern Chinese history, with nearly 300,000 people forced to leave their once fertile homeland. Taking a leaf from Stalin’s book of mass deportations, they were relocated to barren desert areas.
The city now has a population of 2.9 million, but its gross domestic product growth rate has plummeted in the past few years – falling from 15.2 per cent in 2010 to 3.5 per cent last year, according to government data. That made the city government desperate to find an economic tonic.
The city’s disgraced former party secretary, Yang Shuping, who has been under investigation for corruption since July last year, said in 2011 that the seed of the Suda project was planted in 2008 when he bumped into scientist Li Fuhuo at an industrial convention and was impressed by an invention Li was promoting that could improve the performance of vehicles’ engines.
Li set up shop in Sanmenxia later in 2008, with his hi-tech chrysalis turning into Suda two years later. In 2011, the city government ramped up its ambitions and published an ambitious electric car plan, with an annual production target of 100,000 vehicles by 2015.
Suda became the poster child of the plan, but producing an electric car proved challenging, despite roughly 1 billion yuan in early investment from Zhong Ao Wu Fu, a Beijing-based company that sells health-care products. The Suda group also listed a unit on China’s National Equities Exchange and Quotations system, the country’s over-the-counter, third-board market last year, but the amount of funding it raised in that exercise is not known.
Suda spokesman Xu Weimin, who previously worked in the city government’s news office, said it was unfair to call it a “zombie company” because its business was still making progress.
He said a few sample vehicles had passed national safety and technology tests in November and the company was now in the process of applying for a mass production licence from the National Development and Reform Commission.
The commission, which is the central government’s main economic planner, has already issued production licences to five electric car start-up projects, and Bloomberg reported in August that it was considering capping the number of licences for start-ups at 10.
Scott Kennedy, a director at the Centre for Strategic and International Studies, a Washington-based think tank, said subsidising a new electric car “makes no sense”.
“There are likely dozens, or hundreds of similar useless efforts occurring throughout the country, not just in electric vehicles, but in semiconductors, renewable energy, robotics, big data, and other high-priority technologies where subsidies are flowing faster than water through the Three Gorges,” he said.
Kennedy said administrative-led efforts to address overcapacity and push production up the value chain were worrying signs that Beijing was trying to strengthen its hand on the economy under President Xi Jinping, rather than relax controls.
“Even though China was far from a liberal market economy under his predecessors, without a doubt government intervention has expanded and deepened on Xi’s watch,” he said.
Tsinghua University economist Yuan Gangming and Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics, concurred.
Yuan said the dominant model in China’s economic transformation was now a combination of Beijing’s industrial policy and proactive intervention in business by local governments.
“Especially in provinces where capital and talents is scarce, introducing some hi-tech companies and keeping them alive can be viewed as a life-or-death battle for local officials who are under huge pressure to meet GDP targets and ensure stability,” Yuan said.
Lardy said government intervention in the economy had intensified since Xi became Communist Party general secretary in late 2012.
“The best evidence is that private investment growth, relative to the growth of state investment, has slowed dramatically,” he said.