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Economy

ELECTRIC SHOCK

As local authorities jumped on the new energy vehicle bandwagon, many found that lack of regulation and low barriers to entry are seeing a greater drive toward bankruptcy than profits

By NewsChina Updated Oct.1

The Jiangsu Saleen Automotive Technology Co., Ltd. factory lies idle after production was suspended in June 2020

American former racing driver Steve Saleen (right), one of the founders of Jiangsu Saleen Automotive Technology and Jason Statham, Hollywood star and brand ambassador for Saleen, in the experience center in Beijing, July 20, 2019

Wang Xiaolin introduces a Saleen sports car at Beijing International Automotive Exhibition, April 20, 2014

Once a shining light in the electric vehicle (EV) industry in Jiangsu Province, Jiangsu Saleen Automotive Technology (JSAT) has suspended all production. In early June, two of JSAT’s factories in the city of Rugao, Jiangsu Province, were seized by the local intermediate court, its bank account was locked and virtually all its employees resigned, placing the city’s once burgeoning EV industry in limbo. 

JSAT spent nearly 6 billion yuan (US$86m) on factories, employees, marketing and manufacturing, but only 31 low-end electric cars were ever sold. In the opinion of Wang Xiaolin, chairman of JSAT, the money was far from enough to make a car. “Among all EV manufacturers in China, JSAT is the most cost-effective. We have rich experience in financial control. An electric vehicle will never be produced without an investment of 10 billion yuan (US$1.4b),” he told NewsChina in the US. 

According to Qiao Yudong, former senior legal manager at JSAT, Rugao had a public budget of 7 billion yuan (US$100m) in 2019, most of which was sunk into JSAT’s EV project. On April 27, Qiao reported Wang Xiaolin as being “a false technology investor who has embezzled a huge amount of State assets.” 

Chen Jianjun, deputy director of Rugao government’s publicity department, told NewsChina that the failure of the JSAT project has become a salutary lesson for other cities in Jiangsu and government agencies. “We should be more careful when we launch EV projects in the future and more stringent examination is needed to check the qualifications of enterprises.” 

China started boosting new energy vehicle (NEV) strategies in 2009, when it began offering support measures, which included nationwide subsidies. Government data shows that from 2015 to 2017, more than 200 NEV projects were launched in the Chinese mainland with a total investment of 1 trillion yuan (US$143b) and accumulated manufacturing capacity of over 21.24 million vehicles. 

In 2019, Chinese automobile sales started to decline across the board, and government subsidies have decreased also. There are now 40 new energy vehicle manufacturers in China. Yet local governments are still enthusiastic over the prospect of investing in the NEV industry. 

“The automobile industry is so attractive to local governments because it can drive the development of an entire industrial chain,” said Li Jinyong, deputy director of China Auto Dealers Chamber of Commerce. “It’s the biggest source of tax revenue.” 

Car-building Mania
Rugao has a population of 14.2 million people and it has become well-known in Jiangsu Province as a new energy vehicle city. In the wake of the 2008 economic crisis, the city’s industrial base, which included international shipping, photovoltaic production and biological medicine, was floundering. Rugao cast its eyes at the developing NEV industry and released a package of measures to lure investment. Chen Xiaodong, Party chief of the city, said publicly that NEV manufacturing was a strategic decision.  

Established in 2009, Rugao New Energy Auto Industrial Park occupies an area of 20 square kilometers with a dozen NEV manufacturers, including JSAT and GreenWheel EV. There are also more than 30 enterprises involved in the supply chain, including lithium battery makers, tires and auto parts. 

The industrial park aimed to produce 800,000 vehicles with an output value of 100 billion yuan (US$14.35b) by the end of 2020, becoming China’s most competitive NEV industrial base for auto manufacturing, trade, finance, culture and service in the Yangtze River Economic Belt. 

In 2010, Rugao introduced its first new energy vehicle enterprise - GreenWheel EV, with a planned investment of 4 billion yuan (US$574m) and an annual production capacity of 200,000 EVs. The company back then did not have a manufacturing license for EVs, and it was only after intervention from the Rugao government that the firm obtained permission to produce mid-size and large electric buses.  

In 2012, the provincial economic and information commission designated Rugao as the only NEV industrial base in Jiangsu Province. But the high cost of attracting auto manufacturing enterprises also generated high risks for the local government. Auto enterprises based in the industrial park have fallen one by one because of financial shortfalls, technical difficulties or poor sales.  

In early 2020, GreenWheel EV halted production. According to a report released by Pingan Bank in June 2020, GreenWheel EV owed the bank 112 million yuan (US$16m) and interest payments of 1.25 million yuan (US$180,000). The bank has transferred 24 percent of the company’s equity and 280,000 square meters of industrial land to other companies. 

Wang Xiaoxiang, adviser to the NEV industry in Rugao, said that local governments see the automobile industry as a lucrative sector that can drive employment. “Local governments want big projects. As long as one major project is inked and goes into production, GDP in the area will rise to a new level,” he told NewsChina.  

Cui Dongshu, secretary-general of the China Passenger Car Association, told NewsChina that the fundamental goal of any local government is to drive economic development and NEV projects have become the perfect engines. From 2015 to 2017, more than 20 NEV projects were inked in Zhejiang Province alone. 

“An economic output of 20 billion yuan (US$2.9b) will be created if 100,000 vehicles with a single price of 200,000-yuan (US$28,700) could be sold,” he said. 

Land use rights are the ace in the hole for local governments to obtain investments from auto manufacturers. Rugao provided JSAT with 1.6 square kilometers of land. GreenWheel EV also obtained 0.8 square kilometers of land from the local government. 

“Many EV manufacturers acquired land at a very low price, so even if they fail to make a single vehicle, they can still get a lot of profit from selling on the land,” Cui said. 

Struggle to Survive
Starting in 2020, an increasing number of EV manufacturers in China have declared or are on the verge of bankruptcy, including Bordrin, Byton and Qiantu, all based in Jiangsu, and SD EV based in Henan Province. Many NEV companies had starry launches with funds from big tech and management connected to prominent names in auto manufacturing, including foreign firms like BMW, or in the case of JSAT, Steve Saleen, a former racing driver and designer.  

Li Jinyong, deputy director of the China Auto Dealers Chamber of Commerce, told our reporter that an industrial reshuffle in the sector is unavoidable. Generally speaking, NEV enterprises have a relatively small and weak industrial chain, but traditional auto enterprises have advantages in economies of scale which are based on an output of over 10 million vehicles. 

“The production costs of NEV enterprises are still too high,” Li said. “It would be nice if three or five NEV enterprises could survive.” 

Nowadays, NEV enterprises are no longer highly sought after in the capital market especially after a continued reduction in government subsidies. Zhang Wei, chairman of Co-Stone Capital, argued that no NEV enterprise in China is worthy of investment. 

Whether NEV enterprises can survive or not largely depends on support from local governments, who have become the largest source of finance for the NEV sector. Auto industry analyst Zhong Shi told our reporter that NEV enterprises deliberately bind themselves with State assets and shoulder risks with local governments. If there is a problem, he said, it is very difficult for State assets to retreat. 

In June, Nanjing Byton Electric Vehicle Corporation said it was experiencing a crisis which reportedly meant a four-month delay to salaries. In April, its office in Shanghai was closed and in June its office in Beijing shut. Its factory in Nanjing, capital of Jiangsu, closed because of arrears in utilities. 

“We have invested billions of yuan into the Byton project. If it’s declared bankrupt, it will be a great burden to repay the debt,” an employee at the management committee of Nanjing Economic and Technology Development Zone said, on condition of anonymity. 

Local governments mainly invest in land and factory buildings, so if a business fails, these means of production can be reused. Cui Dongshu said that it is the bank that suffers most. “The investment comes from banks, and there is a high likelihood it will become a bad asset,” he said. 

Several auto industry insiders told our reporter that it is difficult for local governments to appraise the technological credentials of NEV enterprises. To make matters worse, local governments lack awareness of risk control and most of the time studying the feasibility of a joint-venture project is a formality. 

Jiangxi Province was criticized by the National Development and Reform Commission (NDRC) due to excessive investment in the NEV industry. From 2015 to 2017, Jiangxi introduced 18 NEV projects but some never even started production. Eleven did start, but seven are behind schedule. 

Xia Yingjie, chairman of Jiangxi Jiangling Motors Overseas Sales Company and a member of Jiangxi Political Consultative Conference, warned that most NEV enterprises in the province have weak financial backing and R&D. It is high time to raise the entry threshold for NEV enterprises, Xia said, and their design capability, manufacturing quality and marketing capacity must be subject to strict oversight in order to avoid overcapacity in low-end products. 

On January 10, 2019, the NDRC issued an investment regulation on the NEV industry which states that before a new project is launched, local governments should eliminate all zombie enterprises in the sector, and existing enterprises should accomplish the scheduled output. In addition, NEV enterprises should have core technologies in design, manufacturing and battery production. The NDRC also delegated the power of examination and approval of NEV projects to the provincial government. 

Jia Xinguang, chief analyst at China Automobile Industry Consulting, argued that the delegation of power has pushed provincial governments to balance NEV development in accordance with the specific circumstances of different cities and their strengths.  

“In previous years, local governments’ attitude towards NEV projects was the more, the better. Nowadays, provincial governments tend to support one or two key projects,” he said. “If a project fails, the NDRC is quite likely to end all NEV projects in the province.” 

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