August 17th, 2024

China's manufacturers are going broke

China's manufacturing sector is struggling, exemplified by the bankruptcy of Hengchi's subsidiaries. The EV maker's sales fell drastically short of its ambitious targets, affecting global supply chains and competition.

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China's manufacturers are going broke

China's manufacturing sector is facing significant challenges, highlighted by the recent bankruptcy of two subsidiaries of Hengchi, an electric vehicle (EV) manufacturer owned by the troubled property developer Evergrande. The company had ambitious plans to sell one million EVs annually by 2025 but managed to sell only 1,389 units last year, reflecting intense competition and overcapacity in the market. This situation serves as a reminder that while foreign competitors often worry about the impact of low-cost Chinese goods, Chinese manufacturers are grappling with their own financial difficulties. The broader implications of these bankruptcies could affect not only the domestic market but also global supply chains and competition dynamics.

- China's manufacturing sector is experiencing a wave of bankruptcies due to overcapacity.

- Hengchi, an EV maker, reported the bankruptcy of two subsidiaries amid fierce competition.

- The company aimed to sell one million EVs by 2025 but sold only 1,389 last year.

- The situation highlights the financial struggles of Chinese manufacturers despite concerns from foreign competitors.

- The challenges faced by Chinese manufacturers could impact global supply chains and market competition.

Link Icon 26 comments
By @lenerdenator - 4 months
Well, if they want to learn from the US, they should ship their manufacturing capacity and intellectual property off to their geopolitical rival for short-term monetary gain.
By @highfrequency - 4 months
These are some staggering numbers: 52 thousand Chinese EV companies shut down last year.

Xi Jinping (successfully) stimulated EV and semiconductor manufacturing through massive government investment and loans. The problem is that so many companies were funded that they are now viciously driving each other out of business through oversupply.

Because the supply chain networks are so dense, each bankruptcy easily cascades because the company then defaults on contracts with vendors and customers.

None of this, of course, is good news for US competitors like Tesla. With such a large field of vicious competition, it’s almost assured that the small set of businesses that succeed will be able to outcompete globally with extremely low cost structure. We see this happening with BYD.

By @jncfhnb - 4 months
> Hengchi, an electric-vehicle (ev) maker owned by Evergrande, a failed property developer, told investors that two of its subsidiaries had been forced into bankruptcy. The group originally aimed to sell 1m evs a year by 2025; amid feverish competition it sold just 1,389 last year.

When you miss sales targets by 99.9% it’s got to be more than a competition problem

By @kwhitefoot - 4 months
> China’s solar industry is also grappling with oversupply. This year the prices of most components of solar modules have fallen below their average production cost.

This should surely be regarded as an opportunity to install solar panels at low cost while stocks and production capacity still exist.

By @yorwba - 4 months
Their graph off loss-making industrial enterprises looks slightly more dramatic than the underlying monthly data.

If you check the National Bureau of Statistics' data on 亏损企业 (月度数据 > 指标 > 工业 > 工业企业主要经济指标), https://data.stats.gov.cn you see that there is a yearly cycle where the number jumps in February: from 67,570 in 2021-12 to 132,371 in 2022-02 (January is skipped), from 91,222 in 2022-12 to 161,892 in 2023-2, and from 103,994 in 2023-12 to 167,895 in 2025-02. By plotting the last available month for every year, 2024 ends up sticking out a bit more than it will once the end-of-year data is out.

Nonetheless, the overall trend is undeniable.

By @klyrs - 4 months
By @andrewl - 4 months
Their audio version of the article is free at:

https://www.economist.com/media-assets/audio/062%20Business%...

By @rurban - 4 months
https://archive.is/20240815105917/https://www.economist.com/...

Some overly subsidized EV companies are going broke, and their inflated housing market crashes. Evergrande. Of course. That's a good thing.

Still stronger growth than everywhere else. And their chip industry will soon be independent. This US war backfired massively.

By @486sx33 - 4 months
It’s pretty simple, Chinese companies need to lower Chinese wages, reduce costs, reduce profit expectations, provide lower cost shipping to ports, guarantee the quality of their product once it arrives in North America not pay when it leaves the factory.

We want $1 products again at dollar tree (not $1.25 tree), and better quality for less money.

Otherwise we will just make the stuff in the USA ourselves. One day we will get smart and export more TO China because no one in China trusts the quality of anything made in China

By @xrd - 4 months
Does anyone know if this means hot deals on extra EV inventory?

I tried to buy an electric golf cart which looked like a Hummer on Alibaba, but importing it (getting it past customs) was challenging. They had me at MP3 player!

If I could buy an EV for $3k, it would be worth the hassle with charging infrastructure and hiding an illegal vehicle from the coppers. </joke>

By @jeffbee - 4 months
China: tons of stuff, no profits.

America: lots of profit, no product.

Maybe we can borrow from each other? I can think of a bunch of sclerotic industries in America that need to have their margins driven to zero.

By @humanlity - 4 months
It’s amusing to see discussions about exotic markets like this. While I don’t agree with the CCP’s policies, I believe the issue is more related to free-market dynamics. Given today’s inflation, potential buyers are saving every penny. In China, unlike in the West, people spend based on their expectations and income, and they never resort to deficit spending.

Considering the market situation and geopolitical factors, it is foreseeable that labor-intensive, low-value-added manufacturers are going bankrupt. Frankly, Europe and the US face similar situations.

Regarding Taiwan and the South China Sea, the distrust of the East among Chinese people is influenced by historical experiences with North Korea, Japan, and Vietnam. However, in today’s world, war is a significant and serious issue, and ordinary citizens do not want to face its bitter consequences. What confuses me is that Western media often portray China as a threat, while Chinese mainstream media exaggerate these reports, deepening mutual hatred.

P.S. I’m Chinese.

By @maxglute - 4 months
China's manufactures finding the winners. This is the system working as intended - create many producers in xyz sector via subsidies, hardcore (involution) competition from 1000s in different provinces innovate manufacturing to bare margins, losers go out of business/ get bought up by better competitors and consolidate like _intended_ outcome of other PRC industrial policy. TLDR Set up competitive environment to force producers speed run to a $250 model-T while everyone else could only make cars for $1000. Have so much competition to force manufactures to improve processes/drive down prices/affordability in short time and then settle with a few large but sustainable survivors that are globally competitive / can (out)compete with western incumbents.
By @djfobbz - 4 months
I live in China, and what I see is quite the opposite.
By @kkfx - 4 months
I fail to see a specific news, the article cite a single example of a failed BEV OEM, there are many, it's perfectly normal that some are not good enough to survive. In our golden age of automotive we have had countless automakers, most have failed some have skyrocketed...

Aside overcapacity should be synonymous of low prices, I still wait to see here in EU prices like in the BRICS area for products imported from China. An example a BYD Atto 3 here cost a bit less than 40k€ while in Thailand cost a bit less than 10k€ https://asia.nikkei.com/content/1f9ed40b4b44745e1a39fafaf94b... such price delta have no justification in mere free market economical terms, have only political justifications NONE OF THEM acceptable by the civil society. I still wait to see LFP batteries prices drops like in China to have a well-sized home battery at a price cheap enough to make buying it convenient, let's say 50kWh for 5k€. Let's say 15kW p.v. inverter for 1.5k€ etc.

If China manufacturers goes broke we customers do the same in EU, and I suspect in USA to, simply to enrich some local cleptocrats.

By @User23 - 4 months
Excess slack in productive capacity can be taken up not only with exports, but also with domestic demand side stimulus. The Chinese market is huge and can almost certainly generate demand for this productive capacity with proper fiscal policy.
By @Veedrac - 4 months
This feels like a month later repeat of https://www.economist.com/business/2024/06/17/chinas-giant-s..., which I first learnt about through a response in Asia Times, https://asiatimes.com/2024/07/chinas-subsidies-create-not-de....
By @rkwz - 4 months
Genuine question, if they have so much excess capacity and low domestic demand, wouldn't it be easier to just export to other countries? Or are there barriers put in place in the world stage that limits this?
By @kibwen - 4 months
The CCP's current manufacturing policy is analogous to the modern venture capitalist approach of "subsidize the product until your competitors go broke, then reap the fruits of having a captive market by the balls", except the fruits have gone from "the power to set prices as a monopoly and extract a massive amount of profit" to "massive geopolitical leverage against countries that are dependent on your exports". It's a risky strategy because it's trivially countered by protectionist policies, but that depends on countries voluntarily refusing the free money that China is doing its best to shovel into your pockets. In other words, it's a bet that China's rivals cannot successfully resist short-term greed despite the huge and transparent long-term risks.
By @naveen99 - 4 months
If the capacity was for exports of ev’s, solar panels, batteries to U.S. and Europe, the 100% tariffs are going to bring some pain. somehow iPhones, leather bags are not getting tariffs.
By @olalonde - 4 months
The title of the article is a bit misleading. Manufacturers are going broke because there's too many of them, which is arguably a nice problem to have.
By @bawana - 4 months
If china is pumping so much money into their economy, subsidizing every manufacturer, why dont they have runaway inflation?
By @seatac76 - 4 months
A lot of these were unsustainable to begin with, the number inflates the viability. The key players are expanding, and increasingly building out manufacturing in cheaper countries like Mexico, Vietnam, Thailand so they will become much more dominant.
By @skullone - 4 months
Paywall
By @okasaki - 4 months
It feels like The Economist and other Western oligarch media have been saying that China is going to collapse "next week" for decades. Almost like they have some sort of anti-reality agenda.