The Chinese Communist Party views electric vehicles as a favorable track to dominate the global high-tech industry and has invested heavily in supporting electric vehicle manufacturers. However, this high-stakes gamble has not only led to overcapacity, industry decline, and triggered countermeasures from various countries, but also caused losses and closures of domestic manufacturers, representing another misfortune of Chinese state capitalism.
This year, the Chinese electric vehicle industry has faced repeated setbacks.
In early October, European Union member states voted to impose tariffs of up to 45% on electric vehicles manufactured in China. In the same month, Canada imposed a 100% tariff on Chinese-made electric vehicles.
In July, Brazil raised the import tariff on pure electric vehicles from 10% to 18%, set to further increase to 35% by July 2026. In the same month, Turkey imposed an additional 40% tariff on electric vehicles from China.
In May, U.S. President Biden announced a three-fold increase in tariffs on Chinese electric vehicles, raising them from 25% to 100%.
These retaliatory actions by various countries stem from the harm caused by China’s overcapacity in the electric vehicle sector to the overall health of the industry.
According to the MIT Technology Review, in order to position Chinese electric vehicles as dominant globally, the Chinese government has taken a series of subsidies, tax cuts, procurement contracts, and other indirect incentives, costing Beijing approximately $230 billion. This move ultimately created a market for 13.1 million vehicles, accounting for 60% of the global electric vehicle inventory.
However, the Chinese government’s support policies have led to overcapacity. Some global automakers have had to restructure or close operations. In October, Mitsubishi Motors announced it would cease production of vehicles in joint ventures in China. Honda (HMC), Hyundai, and Ford (F) have also taken measures, including layoffs and factory sales, to reduce costs, according to stock exchange documents and official media reports.
In April this year, Ford’s electric vehicle division reported a surge in first-quarter losses to $1.3 billion, translating to a loss of $132,000 per vehicle sold in the first three months of the year. The division (referred to as Model e by Ford) sold 10,000 vehicles this quarter, a 20% drop from the same period last year. Its revenue plummeted by 84% to about $100 million. Ford attributed this mainly to the industry-wide decline in electric vehicle prices.
In recent years, automobile manufacturers across the United States have invested millions in electric vehicle strategies. However, these investments may not yield returns as electric vehicle manufacturers across the country incur thousands of dollars in losses for every vehicle sold.
According to a new report by analysis firm Boston Consulting Group (BCG), U.S. automakers incur about $6,000 in losses for every $50,000 electric vehicle sold in the U.S. Companies like Rivian and Lucid have also experienced similar exorbitant losses. Earlier this year, Rivian revealed a loss of $33,000 for every truck sold, while Lucid reported a loss of $400,000 for every car sold, ranking at the top of this figure.
In August, pure electric vehicles accounted for 14.4% of the EU’s auto market, down from 21% the previous year. This marks the fourth consecutive monthly decline this year, sharply contrasting with almost flat growth from the previous year.
Under a crumbling nest, can there be unbroken eggs? Chinese electric vehicle manufacturers have also suffered heavy losses.
Despite electric vehicles currently accounting for over half of the new car sales market in mainland China, the profitability prospects for Chinese electric vehicle (EV) manufacturers remain dim as brutal price competition intensifies. While sales forecasts in the world’s largest automobile market are optimistic, only two local companies, BYD and Li Auto, are profitable, putting pressure on about 30 competing rivals to face losses.
The three major electric vehicle manufacturers with second-quarter financial reports released so far – Xiaopeng Motors, Geek+ Technologies, and Zero – collectively reported losses of 42.9 billion yuan ($6 billion). Although the losses have narrowed by 20% from a year ago amounting to 53.5 billion yuan, this has raised new concerns that further discounts could weaken the industry.
Chinese electric vehicle manufacturer WM Motor applied for restructuring in October this year. Human Horizons, the owner of the high-end electric vehicle brand HiPhi, paused operations for at least six months in February.
In August, Xiaopeng Motors, headquartered in Guangzhou, announced a second-quarter net loss of 1.28 billion yuan. Zeekr, a high-end electric vehicle manufacturer under Geely Automobile Holdings, reported a net loss of 1.81 billion yuan in the three months ending in June.
Operational difficulties have left manufacturers cash-strapped. According to Bloomberg data, by the end of 2023, Nio Motors will need approximately 295 days to settle accounts payable, the majority of which is owed to suppliers, compared to 197 days in 2021. Another Chinese electric vehicle manufacturer listed in the U.S., XPeng Motors, requires 221 days to fulfill obligations to suppliers and stakeholders, compared to 179 days in 2021.
In the second quarter of last year, Nio Motors reported a loss of $835 million, equating to a loss of $35,000 for every car sold.
Despite the downturn in the electric vehicle industry, the Chinese government continues to generously pour money into it.
In 2020, when Nio Motors nearly depleted its cash reserves, the local government immediately injected $1 billion to acquire a 24% stake. A state-owned bank led other lending institutions to inject $1.6 billion.
According to research by the Strategic and International Studies Center at the think tank Foundation for Defense of Democracies, from 2009 to 2023, Chinese government support for electric vehicles amounted to $230.9 billion. From 2009 to 2017, annual absolute funding was about $6.74 billion. The government support funds roughly doubled from 2018 to 2020, then saw another significant increase since 2021.
The government’s support funds come in five forms: approved buyer rebates, exemption from a 10% sales tax, subsidies for infrastructure (mainly charging stations), electric vehicle manufacturers’ research and development projects, and government procurement of electric vehicles.
The reason why the Chinese government is providing such extensive aid to electric vehicles is that it is seen as a strategic area to dominate the global market.
Tu Le, Managing Director of Sino Auto Insights consulting firm, told the MIT Technology Review, “They realize…they will never surpass traditional car manufacturers from the United States, Germany, and Japan in internal combustion engine innovation.” Research on hybrid cars has been led by countries like Japan, meaning China cannot compete in that aspect as well. This prompted the Chinese Communist Party to invest in a new area – vehicles entirely powered by batteries.
As a result, as early as 2001, the Chinese government took measures to invest in related technologies; that same year, electric vehicle technology was introduced as a priority scientific research project in China’s highest economic blueprint, the “Five-Year Plan.”
In 2007, Wan Gang, an automotive engineer who had worked at Audi in Germany for ten years, was appointed as China’s Minister of Science and Technology. Subsequently, the electric vehicle industry received significant impetus. Wan Gang has always been a staunch supporter of electric vehicles and tested Tesla’s first electric vehicle, the Roadster, in 2008. Since then, the development of electric vehicles has been prioritized in China’s national economic planning.
The MIT Technology Review article pointed out that this is the essence of China’s national economic system – the government concentrates resources on the industries it wants to develop.
Chen Hong, a Senior Research Fellow at the Geoeconomics Center of the Atlantic Council, wrote that a common problem in China’s state capitalist economic system is overcapacity. The strategic decisions of Chinese Communist Party leaders invest resources in selected industries. This practice, unconstrained by the market economy, leads to overcapacity and generates adverse side effects.
One example of overcapacity caused by China’s state capitalism is the large-scale stimulus program launched in response to the 2008 global financial crisis – providing cheap credit to stimulate infrastructure and housing construction. This led to overcapacity in materials such as coal and steel, resulting in producer price deflation for over fifty months. Additionally, overcapacity in the steel industry has generated strong dissatisfaction among other steel-producing countries.
Another example is semiconductors. In 2014, the Chinese government established a large fund to build a domestically manufactured chip supply chain to reduce reliance on the United States and its allies. Eight years later, $30 billion has poured into the chip industry, with an additional $20 billion influx. In 2020 alone, China created 58,000 semiconductor companies between January and October – an average of about 200 per day. Tsinghua Unigroup was one of the star performers.
The large fund invested at least $2 billion in Tsinghua Unigroup and its subsidiaries for the development of wafer manufacturing, flash memory chips, and 5G chips. However, this industry giant ultimately faced bankruptcy in 2021. Two other senior executives of the company are under investigation. China seeks to leverage state-directed funds to compete with the United States in the increasingly intense technological race. However, Tsinghua Unigroup’s bankruptcy demonstrates the disasters created by China’s state capitalism.
The turmoil facing the electric vehicle industry is yet another misfortune of Chinese state capitalism.
Milan Ezrati, Chief Economist at New York communications company Vested, wrote that as overcapacity issues become apparent, the Chinese government has cut support for the electric vehicle industry by nearly 66%. In such a situation, weaker, less efficient, and lower-quality companies are on the brink of closure. However, many local governments are still spending money to sustain those zombie companies.
For example, some regions such as Shanghai, Shenzhen, and Changping have begun offering rebates of 1,000 to 10,000 yuan per vehicle to Chinese electric car buyers. However, these local governments are facing financial difficulties. They are almost unable to support unprofitable companies, especially given the minimal likelihood of a global sales recovery.
The electric vehicle industry will eventually see consolidation, and private investors and local governments will face losses. By then, the road to economic recovery in China will once again face obstacles.
In February this year, He Xiaopeng, CEO of Xiaopeng Motors, wrote in a staff memo, “This year also marks the beginning of fierce competition among Chinese automakers, a competition that may end with a ‘bloodshed’ (or what I prefer to call a cruel ‘elimination game’).”