Could China's electric carmakers bring on another Evergrande moment?

Sydney Morning Herald

27-05-2025

With Xi Jinping strongly resistant to measures to stimulate consumption and the trade war with America clouding the economy's outlook, China's economy and household consumption will, without extraordinary measures, continue to wane and limit the growth rate of EV sales.
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BYD's attempt to stimulate demand came after its sales have been running at half the very ambitious targets it set itself for this year. It was targeting a 30 per cent increase in sales, but they are tracking at half that growth rate.
BYD had hoped that offering its new 'God's Eye' autonomous driving system as a standard feature would drive a big surge in sales, but that hasn't eventuated.
With most of the other major Chinese electric carmakers also budgeting for significant growth, there is significant oversupply and a massive increase in dealers' inventories. As of last month, there were about 3.5 million cars – nearly two months' supply – in unsold stocks, the most in two and a half years.
Dealers are going broke, along with suppliers to the sector who are being squeezed by carmakers that are themselves under extreme pressure.
It's little wonder, then, that the chairman of Great Wall Motor, We Jianjun, said last week the Chinese auto industry was experiencing its own 'Evergrande.'
China Evergrande, the world's most indebted property developer, formally collapsed last year, but was in crisis from the moment Xi introduced the 'three red lines' restrictions on developers' debt levels in August 2020.
It was the first of the major dominoes in China's property industry to fall, with the fallout then spreading throughout the construction sector, suppliers and property buyers and subsequently hitting the wider economy.
The EV sector in China needs even more consolidation and more sustainable earnings for the remaining players, while China's authorities, as was the case in the property sector, need to do something about the large-scale misallocation of capital and resources -- including the distortions provided by state incentives and mandates -- if the continuing rationalisation of the industry is to remain reasonably orderly.
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What the oversupply and ferocious competition in the sector has done, however, is drive continuous innovation, with China's electric cars now providing the world's leading-edge EV technology from batteries to software, and global dominance.
The companies that are profitable, or have some prospect of achieving profitability, are having success in offshore markets, where the gross margins are far fatter than in their home market. Indeed, with its international success BYD is now more profitable than Tesla, whose profitability has slumped dramatically.
The over-production of Chinese EVs and the cost advantage they have over their international competitors because of the scale of the domestic industry, the support they get from central and local governments, the leadership they have in battery technologies and the stranglehold China has on critical raw materials has generated some backlash in other markets.
Governments are looking nervously at the oversupply within China, fearing it will be dumped into their markets and wipe out their own auto industries.
The US, with 100 per cent tariffs on China's EVs, is effectively closed to the Chinese exports. Europe was open and, with its commitment to phasing out internal combustion vehicles, attractive – until the deluge of Chinese electric cars proved too much for the European Union, which slapped tariffs of up to 35 per cent on imports from China, citing the over-capacity and government subsidies.
Even with those tariffs, the margins available in the EU are far greater than in China's domestic market. Some of the Chinese EV companies are wiping out, or at least softening, the losses in their home market with profits in Europe.
BYD and some of its peers are also scrambling to build factories within the EU. BYD, which last month overtook Tesla for the first time in EV sales in Europe, will open a plant in Hungary later this year to circumvent the tariff wall and capitalise on its cost and technology advantages over local carmakers.
The Chinese EV makers' potential in Europe might be slightly blunted by the EU's decision to relax its planned tightening of emissions standards as part of its longer-term plan to phase out internal combustion engines.
The EU is trying to protect its domestic auto industry from both the Chinese invasion and the potential fallout from its own trade confrontation with an aggressively protectionist Trump America. It has given its carmakers a window of three years now to meet tough new standards that were to be implemented this year.
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While Donald Trump has now deferred his threatened 50 per cent tariffs on EU exports until July 9, Europe's car industry is the most obvious target of US trade sanctions.
Because the US market is effectively closed to Chinese carmakers, they are now looking to their own region, South America and Australia to deploy their excess capacity. But they're also facing pushback in some of those markets such as Brazil, which unlike Australia has a domestic car industry. Meanwhile, in some Asian markets stocks of unsold EVs are piling up as demand has already been overwhelmed by supply.
Rising protectionism and the prospect of a significant slowdown in global growth as Trump's trade war with everyone is starting to bite are likely to weaken international demand for EVs, even cheap ones from China.
That would create even more pressure on the overwhelming majority of loss-making manufacturers to exit the sector or be consolidated with the handful that are, or could be, profitable.
It would be a positive development for China, which doesn't want another Evergrande, as well as the rest of the world, which would otherwise be facing a massive dump of Chinese cars that could undermine other nations' car industries and all those who depend on it.