Beyond market conditions: The deeper flaws behind Evergrande Auto's downfall

by Yang Shihan

Evergrande New Energy Auto Group, once among the most ambitious investors in China’s electric vehicle sector with a reported 300 billion yuan investment in building an industry chain, continues to grapple with severe financial challenges. At the start of the Chinese New Year, the company announced it lacked the funds to support a professional audit of its 2024 financials, further underscoring its deepening crisis.

A recent filing on the Hong Kong Stock Exchange confirmed Evergrande Auto’s ongoing difficulties in securing investors willing to alleviate its liquidity crisis and facilitate restructuring. Over the past six months, the company has resorted to severe cost-cutting measures, including further layoffs and operational spending reductions, in an effort to navigate its financial turmoil.

The announcement came more than 300 days after the collapse of a long-anticipated strategic investment deal, which had been expected to provide much-needed capital. Evergrande Auto attributed its failure to attract investors or buyers to China’s increasingly challenging EV market conditions, citing an intensely competitive environment.

While industry competition has indeed intensified, this does not fully explain Evergrande Auto’s predicament.

Market caution reveals deeper structural issues

China’s EV market has evolved beyond its early growth phase. With a cooling primary market, uncertain commercial prospects, and profitability challenges, automakers are finding it harder to attract investment. Compared to the investment boom of earlier years, recent market adjustments have led to a more discerning approach from investors.

According to Xu Yanhua, secretary-general of the China Intelligent and Connected Vehicles Industry Innovation Alliance, China’s smart vehicle sector saw 168 investment deals totaling over 100 billion yuan in 2021. By 2023, deal volume had nearly halved to 81, with total funding shrinking to approximately 45 billion yuan. This trend reflects a broader de-risking in the market and a shift towards companies with stronger fundamentals.

Weaker EV brands are facing increasing difficulties in securing financing. Zhang Yichao, a partner at AlixPartners’ Greater China automotive practice, noted that the EV sector is becoming more competitive. Given the heightened risk and lower probability of success, investors are shifting focus to opportunities with clearer pathways to profitability.

The key issue is Evergrande Auto’s inability to establish itself as a credible car manufacturer. While the investment climate has become more cautious, it has primarily exposed the company’s underlying vulnerabilities rather than being the root cause of its challenges.

According to an industry analyst speaking to Jiemian News, Evergrande Auto failed to acknowledge the complexities of the automotive industry. The company’s approach emphasized land acquisition and real estate expansion, which overshadowed its core focus on car production.

Evergrande entered the EV market just as China’s real estate sector was transitioning away from aggressive expansion. With real estate firms seeking alternative growth opportunities, many turned to EVs—a sector perceived as having strong potential despite broader economic uncertainties. In 2017, Evergrande chairman Xu Jiayin sought to leverage financial resources to enter the industry, acknowledging the company’s lack of technology, talent, and experience. Rather than aiming for a gradual industry entry, he pursued an aggressive acquisition-driven strategy.

Xu summarized Evergrande’s approach with 15 characters: "Buy, buy, buy; merge, merge, merge; enclose, enclose, enclose; big, big, big; good, good, good." The company sought to acquire available technologies and companies, forging a vast EV ecosystem through partnerships.

However, this approach underestimated the technical and operational demands of car manufacturing. Unlike real estate, where capital deployment can yield relatively quick returns, EV production requires long-term investments in research, development, and supply chain integration. Even acquired technologies must be properly integrated into a cohesive production system, something Evergrande struggled to achieve.

Leadership and execution challenges

Evergrande Auto’s reliance on acquisitions and partnerships also left it with limited in-house R&D capabilities. This weakened its competitive positioning, particularly in an industry where proprietary technology is a key differentiator.

Additionally, the company’s leadership was primarily drawn from Evergrande Group’s real estate and financial divisions, with minimal automotive expertise. Among its ten vice presidents, only Gao Jingshen, who oversaw manufacturing, had prior industry experience, having worked at Faraday Future. The lack of sector knowledge among top executives led to delays in production facilities in Shanghai and Guangzhou, while the launch of its first model, the Hengchi 5, faced repeated setbacks. Despite Xu Jiayin’s directive for rapid production ramp-up, the model consistently missed its deadlines.

Evergrande’s overly ambitious expansion further strained its resources. The company planned to develop 15 models and build ten production bases, aiming for an annual capacity of 5 million vehicles within a decade. However, without a single successful model launch, such a roadmap significantly heightened execution risks and inefficiencies.

Real estate entanglements and credibility issues

While struggling to advance its EV business, Evergrande secured extensive land holdings under the banner of automotive projects. According to LatePost, from September 2019 to September 2020, Evergrande acquired 11.33 million square meters of land, of which only half was designated for industrial use, with 35% allocated to residential and 13.34% to commercial projects.

Evergrande’s mounting real estate crisis continued to erode consumer confidence in its EV business. Customers grew skeptical about whether the company could deliver vehicles when it was struggling to fulfill real estate obligations. A former Hengchi dealership manager confirmed that real estate turmoil severely impacted sales, as buyers feared they might not receive their vehicles.

To restore confidence, Evergrande introduced a "notarized purchase" scheme, where payments were held in escrow by the Tianjin Notary Office. However, this did little to alleviate concerns, as the fundamental issue remained the company’s credibility.

Sales figures further highlight these struggles. As of mid-2023, Evergrande had delivered a total of 1,429 electric vehicles. Sources within Evergrande Auto indicated that the majority of Hengchi 5 vehicles were actually sold at a discount to internal employees.

Vanishing dealerships and empty factories

A Shanghai Hengchi dealership manager told Jiemian News that the Hengchi 5 has failed to gain traction in the market, with sales staff struggling to sell even one unit per month. Despite a high commission structure of 3,000 to 4,000 yuan per car, the challenge of convincing skeptical customers has made expanding the customer base exceedingly difficult.

The difficulties in attracting franchisees further underscore Evergrande Auto’s troubles. While company representatives claimed that all dealership slots in 18 cities were filled, Jiemian News found that none of the 21 automotive dealers and 33 car trading companies in seven of these cities had confirmed any cooperation with Evergrande.

These challenges have culminated in dealership closures and factory shutdowns. A visit to Evergrande’s Tianjin factory revealed an overgrown site with minimal activity. A source close to Hengchi Auto stated that the factory, once staffed by hundreds, now had only around 40 employees, half of whom were security guards. Many offices had been cut off from electricity, and production had effectively ceased.

As of mid-2024, Evergrande Auto’s financials showed total liabilities amounting to 74.35 billion yuan. The company recorded just 38.38 million yuan in revenue for the first half of the year, a 75% decline year-over-year. Net losses reached 20.26 billion yuan, nearly triple the previous year’s figure.

As Evergrande Auto continues searching for investors or buyers, its fundamental weaknesses make a successful turnaround increasingly unlikely. With China’s EV industry entering a phase of consolidation, the company faces diminishing prospects for survival.