China’s manufacturers are going broke

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China’s manufacturers are going broke

The Economist | August 8, 2024

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Most news on China’s manufacturers is bad news for rivals around the world. Foreign governments fear their domestic champions will be pummeled by low-cost Chinese rivals. But on August 5th the world got a small reminder that China’s producers face big problems of their own. 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.

The glut in industrial production is not limited to EVs. About 30% of industrial firms were loss-making at the end of June, rising above the previous recorded peak during the Asian financial crisis in 1998, according to the National Bureau of Statistics. Its survey of more than 500,000 companies shows a startling deterioration in the conditions for industrial firms in the first half of the year, during which the number of loss-making companies surged by 44%.

In recent years handouts, cheap loans and direct government investment have poured into areas of manufacturing favoured by Xi Jinping, China’s leader, with some remarkable outcomes. On his watch China has become the world leader in EVs and lithium-ion batteries. But its economy is weakening and consumption is sagging. The Economist has examined three of Mr Xi’s most-favoured industries: EVs, solar modules and semiconductors. The picture that emerges is grim.

Start with EVs. At least eight large makers of the cars have shut down or halted production since the start of 2023. The ripples are visible throughout the supply chain. Some 52,000 EV-related companies shut down in China last year, an increase of almost 90% on the year before, according to one estimate.

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. Many companies in the industry are scaling back manufacturing. Others have scrapped plans to enter the market. The greatest pressure in solar, as with many other manufacturing industries, is among smaller suppliers that have watched the profits they make from their components disappear.

A shakeout is occurring in the semiconductor industry, too. Local governments have focused their investments on low-end chip components in an effort to “easily win market share”, notes an industry insider. Those parts are now in great oversupply and many of the companies producing them are failing. In 2023 nearly 11,000 chip-related firms went out of business, roughly 30 a day, according to Qichacha, a company that collects corporate data.

China’s central government has started to recognise the pressure the country’s manufacturers are under. Mr Xi recently acknowledged over-investment in some green technologies.  Yet it will be difficult for China to avoid a period of industrial involution. Mr Xi’s overriding ambition has been to create high-tech champions across a number of industries that can win in global markets and break his country’s reliance on foreign intellectual property. State support for this has generally flowed through local governments, many of which have spent indiscriminately, resulting in legions of small and uncompetitive suppliers.  The state has started to encourage consolidation. But that will not be straightforward.

3 key takeaways from the article

1. On August 5th, Hengchi, a Chinese 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.
2. The glut in industrial production is not limited to EVs. About 30% of industrial firms were loss-making at the end of June, rising above the previous recorded peak during the Asian financial crisis in 1998, according to the National Bureau of Statistics. Its survey of more than 500,000 companies shows a startling deterioration in the conditions for industrial firms in the first half of the year, during which the number of loss-making companies surged by 44%.
3. China’s central government has started to recognise the pressure the country’s manufacturers are under. Mr Xi recently acknowledged over-investment in some green technologies.  Yet it will be difficult for China to avoid a period of industrial involution.

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Topics:  China, Manufacturing, Overcapacity, Electric Vehicles, Solar Panels, Semi-conductor