The “Zombie” Factories
In 2017, Hyundai invested $1.15 billion in a new factory in Zhongshan, southwestern China, with the goal of producing 300,000 internal combustion engine cars per year.
However, six years later, the rapid shift of Chinese consumers to electric vehicles has caused the company’s sales to decline. Declining sales forced the Korean automaker to sell the factory in December last year for less than 25% of its investment value.
“Hyundai’s Zhongshan factory continues to incur losses, 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 at Jeonbuk Automobile University, a South Korean research organization.
Huyndai left Zhongshan as combined car sales in China for Hyundai and Kia declined to 310,000 units last year, down from nearly 1.8 million units in 2016.
Strong growth of electric and hybrid vehicles in China is occurring as the demand for internal combustion engines decreases.
Analysts predict that in the next decade, the factory will be one of hundreds of “zombie” car assembly plants. This means that businesses are not generating enough cash flow to repay their debts.
According to data from Automobilety, a consulting firm in Shanghai, China produced 17.7 million internal combustion engine cars in 2023, down 37% from the previous peak in 2017.
Bill Russo, former head of Chrysler in China and founder of the consulting firm Automobility, says the rapid decline in internal combustion engine car sales in China means half of the installed capacity in the industry (25 million out of 50 million units) is currently unused.
While some old factories will be repurposed to produce hybrid or pure electric vehicles, many others will not be able to switch to electric vehicle production for various reasons. This poses challenges for both domestic and foreign car manufacturers.
Many car companies in China are eventually faced with two options: shutting down internal combustion engine car assembly plants or continuing production and exporting to Russia or Mexico.
“Survival” Strategy: Transformation for Survival
The fierce price war across the Chinese auto industry is putting pressure on traditional car manufacturers, including leading foreign brands such as Toyota, Volkswagen, and General Motors. These companies have been slow to launch affordable electric and hybrid models and have quickly lost market share to competitors like BYD and Tesla.
Until recently, foreign car brands could only enter the Chinese market through joint ventures with local partners.
To cope with the worsening domestic market situation, Chinese companies are stepping up exports of cheap gasoline cars to Russia, a market that many Western automakers have left after the Ukraine conflict. However, analysts are skeptical about whether sales in Russia will bring significant profits to Chinese car manufacturers.
Foreign brands are also trying to export more from Chinese factories. However, experts believe that in doing so, companies risk cutting production costs at their own factories in other markets.
China surpasses Japan to become the world’s largest car manufacturer
Recently, Volkswagen (VW), the largest foreign car manufacturer in China, refused to provide data on excess capacity in the country but noted that the gasoline car market is still profitable. Volkswagen believes in the growth potential of hundreds of small cities in China, where the population is usually below 3 million people.
This is partly because the car ownership rate in large cities is already very high, and local authorities also restrict the sale of new gasoline cars. However, another important factor is the lack of charging infrastructure in poorer cities, hampering the development of the electric vehicle industry.
“The car ownership rate in China is still very low, with an average ownership rate of only 185 cars per 1,000 people. In the US, the ownership rate is nearly 800 cars per 1,000 people, and about 580 cars per 1,000 people in Germany,” said a Volkswagen representative.
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 completely different approaches to the production process.
Accordingly, electric vehicle customers will increasingly demand cars with more customization options rather than a mass-market product from a dealer.
John Jiang, Nio’s factory director, said all car manufacturers in China are facing a battle for survival. “In the end, not every brand can succeed,” he said.
Reference: FT
