The Big Secret Of Many Chinese Automakers Is That They’re Bad At Making Money

Everyone is afraid of Chinese automakers. It’s why Honda and Nissan are teaming up and Western governments are deploying massive tariffs against them. The fear isn’t unwarranted. Chinese automakers can build competitive EVs, for less money, and faster than automakers almost anywhere else. The not-so-big secret is that many Chinese EV automakers are historically bad at making money.

This will be the last Morning Dump of the year, and the theme is: How much do we have to worry about China next year? Probably a lot, but China’s EV policy has its own massive shortcomings. It’ll be a year of expansion in the automotive sector across the globe, especially in China, but at what cost to China’s bottom line?

In addition to poor profitability, Chinese companies in the automotive sector are finding it hard to play by the rules of international norms, and keep finding themselves in trouble for how they deal with labor. Still, the threat is real enough that Honda and Nissan are teaming up, though the CEO can’t exactly explain why, which isn’t a great sign.

China Has Lost Almost 400 Automakers In Five Years

Here’s a stat that always makes my eyes pop out like a cartoon wolf: In 2019, China had approximately 500 EV automakers. That number is down to around 137 this year, with only 20 expected to be profitable anytime soon according to one analysis. With intense competition comes intense price pressure and this makes it a difficult environment for even a company backed by larger automakers to survive.

This all goes back to China’s industrial policy and its interesting interplay between national, regional, and city goals. Once China decided to go all-in on electric cars it created a ton of incentives and fuel economy rules to stoke development. The initial hurdles were quite low and, with a market as big as China, there were a lot of companies ready to try to reap those sweet government credits as Bloomberg pointed out earlier this year:

Zhidou Electric Vehicles Co., a Ninghai-based manufacturer once backed by Li Shufu’s Zhejiang Geely Holding Group, sold a total of about 100,000 vehicles with a driving range of as little as 62 miles (100 kilometers) per charge between 2015 and 2017. The micro-car maker quickly lost momentum after China ended subsidies for EVs that traveled less than 93 miles between charges in 2018.

Similarly, Beijing Electric Vehicle Co., the EV arm of state-owned BAIC Motor Corp. that led sales of pure-electric cars for more than five years by targeting mainly fleet operators, started to report losses after the subsidy slide.

In the last half of a decade, there have been more EV startups in the market, though mostly there’s been a consolidation around Tesla and BYD as smaller companies falter. This led to a huge price war in China, which has only hastened the demise of weaker companies.

The difference between Tesla and BYD, though, is that Tesla has better access to more lucrative markets outside of China than any Chinese automaker. The two companies had almost identical revenue in Q3 of this year, but BYD only made $1.63 billion in net income, compared to $2.17 billion for Tesla. That’s closer than usual, as Tesla has historically been way more profitable (not to get into the weeds here, but BYD’s gross margins are now a little higher than Tesla’s, but its net profit margins tend to be lower).

Chinese automakers lag behind Tesla and many major automakers in this regard. Again, from Bloomberg:

Industry-wide margins for car manufacturers in the world’s largest market averaged 4.4% in the January through November period, data released Friday by China’s Passenger Car Association show. They averaged 5% in 2023.

That was “still low compared with the average profit margin of 6.1% of downstream industrial enterprises,” PCA said. “The automotive industry needs to effectively reduce costs and increase efficiency, and increase the level of cost control,” Cui Dongshu, the industry body’s secretary general, said.

By comparison, a 4.4% margin is worse than GM, Tesla, and probably even Volkswagen this year. All of this is happening in spite of huge tax credits and incentives for Chinese automakers and consumers at every level. This is also maybe a greater sign that making money with EVs is hard for everyone given that about a third of Chinese cars are expected to be electric cars, with more than half being “electrified.”

China Will See An Increase In Car Sales Next Year, But It’s Going To Have To Pay For It

S&P Global Mobility is out with its forecast for car sales in 2025 and it projects sales of up to 89.6 million vehicles, with most markets slightly increasing in spite of uncertainty. Mainland China is expected to see an increase of 3.0%, which is better than Europe, the United States or Japan.

Still, it’s going to have to pay for that growth:

For the year ending, the combination of the CNY130 billion extension of New Energy Vehicle (NEV) incentives, together with the new CNY75 billion trade-in scheme, 2024 is estimated to recover to at least 25.8 million units (+1.4% y/y), according to S&P Global Mobility. For 2025, despite below par economic activity, the automotive sector will continue to be supported by the NEV and trade-in schemes, along with local government auto incentives, wider government stimulus, and the continuation of the vehicle price wars. 2025 demand for Mainland China is forecasted at 26.6 million units, up a further 3.0% over 2024 levels.

The NEV boom is likely to extend into 2025 with electrified vehicle prices benefitting from cheaper battery costs together with generous national and regional subsidy programs to help stimulate new vehicle demand. Coupled with full NEV tax exemption through to the end of 2025, NEV penetration (as % of passenger vehicles) is projected to further increase to 58% in 2025, from 49% in 2024, according to S&P Global Mobility estimates.

If you want to know why China is so desperate for automakers to export cars, this is why. This is perhaps the greatest weakness in China’s plan to become a leader in EVs. In order to get ahead it had to make a number of compromises that are making it hard to sell cars elsewhere.

China’s foreign policy has long made it a target of other countries, both in the West and in Asia. The country’s support of Russia isn’t winning it any friends in Europe, and its ongoing threat against Taiwan makes relaxed relations with the United States or other Asian countries that much harder.

While all countries subsidize local industries, the same intense subsidies given to Chinese automakers that gave them an edge now make protective tariffs that much easier for other countries to deploy. The rise of post-pandemic populism isn’t helping, either, as countries work harder to protect local jobs.

And, finally, Chinese companies have a different view of labor and environmental standards, which is starting to cause problems as China tries to export cars.

BYD In Trouble For ‘Slavery-Like Conditions’ In Brazilian Plant Construction: Reuters

If I had a dollar for every time this year a company in China got in trouble for exporting car parts suspected of being built by forced labor or a plant itself built by forced labor I’d have at least $3, which isn’t a lot of money but is not something that should happen even once. First, thousands of cars were held up in American parts after an issue with parts from a Chinese supplier that reportedly used forced labor. Then, Chinese tiremaker Linglong got into trouble with Volkswagen for allegedly using forced laborers to build a plant in Serbia.

Now, something similar is allegedly happening in Brazil, reports Reuters:

Brazilian labor authorities had on Wednesday said they found 163 Chinese nationals working in “slavery-like conditions” at a construction site for a BYD-owned factory in Brazil’s Bahia state. BYD said then that it had cut ties with the firm that hired the workers and was working with authorities.

“Being unjustly labeled as ‘enslaved’ has made our employees feel that their dignity has been insulted and their human rights violated, seriously hurting the dignity of the Chinese people. We have signed a joint letter to express our true feelings,” Jinjiang said on its official Weibo account.

Their statement was reposted by Li Yunfei, general manager of branding and public relations at BYD, on his own Weibo account. He accused “foreign forces” and some Chinese media of “deliberately smearing Chinese brands and the country and undermining the relationship between China and Brazil”.

Yes, being called “enslaved” does indeed hurt the dignity of workers. But you know what hurts a person’s dignity even more? Being forced to work long hours or in a debt-bondage situation, which is what is being alleged here.

Honda CEO Can’t Explain Why Nissan Is A Benefit To Honda

I can be cynical at times, yes? Maybe a bit of a pessimist. For some reason, I have a sense of optimism when it comes to the Nissan-Honda merger. Honda is a great car company and Nissan is… a car company. My optimism doesn’t appear to be shared by **checks notes** Honda CEO Toshihiro Mibe.

Get ready, this from Bloomberg via Automotive News is kinda brutal:

Asked what makes Nissan Motor Co. a strong business partner, Honda Motor Co. CEO Toshihiro Mibe struggled to find the right words.

“That’s a difficult one,” Mibe, having just announced plans to bring the two firms together under a single holding company, mused earlier this week before a packed room of journalists.

His remark raised a few chuckles, but on a serious note, it spoke to real and present qualms over why Honda would ever agree to such a risky deal with Nissan, and what it could gain by folding the flailing Japanese carmaker into its business.

Ouch.

As previously reported, this is happening because the Japanese government/Nissan doesn’t want Taiwanese mega-conglomerate Foxconn to buy Nissan. This doesn’t mean the deal is doomed, although Honda itself says it’s not going to go through with it if Nissan can’t get everything sorted on its end.

I still these two kids can make it work.

What I’m Listening To While Writing TMD

Let’s end the year on a super weird, Matt Hardigree-specific song choice certain to alienate everyone. I promise I’ll kick off the year with, like, Meatloaf or whatever. Here’s Caroline Polachek doing a cover of Radiohead’s “True Love Waits” that’s so ethereal it’s almost eerie. Also, she appears to be dressed like a Scottish samurai and is singing in the Musée de l’Orangerie for some reason. BTW, highly recommend the Musée de l’Orangerie. In fact, for no reason at all here’s a quick Rob Harvilla-esque random ranking of the big Paris art museums no one asked for:

1. Musée d’Orsay: It’s in an old train station and it’s usually not crazy busy.
2. Centre Pompidou: Super rad, weird building with random art.
3. Musée de l’Orangerie: You are not too cool for impressionism, especially when it’s displayed on giant walls in the round. Plus, after trying to get through the Louvre it’s nice to relax.
4. Any other specific Paris art museum (Picasso, Rodin, whatever)
5. The Louvre: If you’re Beyoncé and can get them to let you in when no one else is around it’s an amazing collection, but otherwise it’s exhausting just to get into the place, let alone through it.

The Big Question

What’s your automotive resolution for 2025?

Photo: Tycho/The Autopian