Zombie factories
In 2017, Hyundai invested $ 1.15 billion in a new factory in Trung Khanh, southwest China, with the goal of achieving a production volume of 300,000 internal combustion engines per year.
However, six years later, the rapid shift of Chinese consumers to electric vehicles has caused the company’s sales to decline. The declining business forced the Korean automaker to sell the factory in December last year for less than 25% of the investment cost.
“Hyundai’s Trung Khanh factory continues to lose money, and the Chinese car market is struggling with overcapacity. No one is willing to buy this factory at a high price,” said Lee Hang-koo, director of the Convergence Technology Institute of Jeonbuk, a Korean research organization.
Huyndai left Trung Khanh when combined car sales in China of Hyundai and Kia dropped to 310,000 units last year, down from nearly 1.8 million units in 2016.
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Analysts predict that in the next decade, the factory will be one of hundreds of “zombie” car assembly plants. This means that companies do not generate enough cash flow to repay their debts.
According to data from Automobilety, a consulting firm in Shanghai, China will produce 17.7 million internal combustion engine cars by 2023, down 37% from its peak in 2017.
Bill Russo, former director of Chrysler in China and founder of the consulting firm Automobileity, estimates that the rapid decline in sales of internal combustion cars in China means that half of the installed capacity (25 million / 50 million) is not being used.
While some old factories will be reused to produce hybrid or electric vehicles, many others will not be able to switch to electric vehicle production for various reasons. This will pose challenges for both domestic and foreign car manufacturers.
Many automakers in China will ultimately face two choices: stop operations at internal combustion car assembly plants or continue to produce and export to Russia or Mexico.
Survival strategy
The fierce price war in the entire Chinese auto sector is putting pressure on traditional automakers, including leading foreign brands such as Toyota, Volkswagen, and General Motors. These companies have been slow to release cheap and high-quality electric and hybrid cars, losing market share to competitors like BYD and Tesla.
Until recently, foreign automakers could only enter the Chinese market through joint ventures with local partners.
To cope with the increasingly poor domestic market, Chinese companies are increasing exports of cheap gasoline-powered cars to Russia, a market that many Western carmakers have left after the conflict in Ukraine. However, analysts are skeptical whether the Russian market can bring significant profits to Chinese carmakers.
Foreign brands are also trying to export more from Chinese factories. However, experts believe that by doing so, companies risk cutting production costs at their own factories in other markets.
Recently, Volkswagen, the largest foreign automaker in China, refused to provide excess capacity data in this country, but said the gasoline-powered car market still brings profit. Volkswagen believes in the potential for significant growth from hundreds of small cities in China, which typically have populations of 3 million or less.
This is partly due to the high vehicle ownership rate in major cities, and the management agencies there also limit the sale of new gasoline-powered vehicles. But another important factor is the lack of electric charging infrastructure in poorer cities, hampering the development of the electric vehicle industry.
“The vehicle ownership rate in China is still very low, with an average ownership rate of only 185 cars per 1,000 people. In the United States, the ownership rate is nearly 800 cars per 1,000 people and about 580 cars per 1,000 people in Germany,” the Volkswagen representative said.
Industry leaders say the biggest pressure on all traditional car manufacturers in China comes from the rise of new electric vehicle factories. These factories apply a completely different production approach.
Under this approach, electric vehicle customers will increasingly want cars with more customization options rather than mass-market products from a dealership.
John Jiang, plant manager at Nio, said that all car manufacturers in China are facing a survival battle. “Ultimately, not every brand can succeed,” he said.
Reference: FT
