A $4bn factory in central China has come to symbolise the world’s most indebted property group’s moonshot attempt to become a leading electric-car brand.
The unfinished Evergrande Auto plant in Lu’an, a city of 5m in Anhui province, is a far cry from the futuristic structure depicted on a faded billboard near the site’s entrance.
When the Financial Times visited in December, the site was home to a single steel skeleton. It “has basically been on hold since the [coronavirus] epidemic started”, said a truck driver, who declined to be named, of the project that was announced in September 2019.
Evergrande New Energy Vehicle Group, whose Chinese parent owes about $120bn, has invested billions of dollars into developing its electric-vehicle capabilities as it anticipates a boom in the sector. The moves also come as China’s property market faces pressure.
But the venture has been hit by setbacks, including possible government scrutiny of its investments, and is yet to release a vehicle commercially. While two other factories in Shanghai and Guangzhou near completion, work on another three has been slow.
According to Chinese media reports, the group was named in a directive in November from China’s National Development and Reform Commission that asked local governments to investigate land use, investment and progress of EV projects initiated since 2015. The directive is part of an attempt to rein in largesse in the sector.
Evergrande told the Financial Times that the Lu’an factory construction was progressing as planned and the company had not received “any inquiry from any authorities”. The NDRC did not respond to requests for comment.
Evergrande’s EV strategy is unusual compared with many of its smaller competitors in China. Many have been reluctant to build their own factories, instead outsourcing production to established carmakers. Evergrande has vowed to splash Rmb30bn ($4.6bn) on production capabilities between 2019 and 2021.
Evergrande Auto’s plans may have raised suspicions with the government because they look like a “land grab”, said Deng Haozhi, an independent commentator and economist.
Government policies designed to limit aggressive expansion by property developers have restricted land sales, he added. By designating land for electric-car production, Mr Deng believes, Evergrande is able to acquire it more cheaply and it may also help the group negotiate separate deals for other land nearby that it can later build properties on.
Some analysts are less sceptical. They point to Evergrande’s growing technical acumen, such as through its acquisition of UK-based component maker Protean Electric and a majority stake in Swedish carmaker NEVS AB, which included intellectual property for an EV model made by Saab.
Analysts believe that Evergrande could also benefit from huge investor interest in the sector, shown by the rocketing share prices of US group Tesla and Chinese rivals like Nio and Xpeng.
Hong Kong-listed Evergrande Auto has raised hundreds of millions of dollars from investors including internet group Tencent and car-hailing platform Didi Chuxing. It is also considering a secondary listing on Shanghai’s technology-focused Star board.
Beijing is keen to cool China’s property sector, in August announcing its so-called “three red lines” approach, which limits how much developers can borrow.
That raised the impetus on debt-laden Evergrande to explore interests outside of property. The company owed $120bn as of June and last March unveiled a plan to reduce its debt by Rmb150bn a year through to 2022 partly by selling assets.
But Evergrande’s record of swapping between sectors is a reason for caution, believes Nigel Stevenson, an analyst at consultancy GMT Research in Hong Kong. The car unit’s listed entity was known as Evergrande Health until August last year.
“You feel a sense of déjà vu with Evergrande. A few years ago they were investing in solar panels. None of these spin-offs have made a significant contribution to resolving the parent’s debt problems,” he said.
Evergrande Auto’s losses are mounting, reaching Rmb2.5bn in the first half of 2020, up 24 per cent compared with the same period a year before.
That could increase the urgency for Evergrande to get a vehicle to market. The company’s first model, the Hengchi 1, is intended to compete with Tesla’s premium Model S when it goes into mass production in 2021, about a year later than initially expected. The company has a total of 14 Hengchi-branded models in the works.
Delays have not helped. A technician at Evergrande’s factory workshop in Guangzhou, southern China, told the FT in early December that a trial of production at the facility had been pushed back because of equipment adjustments.
Evergrande will have also have to deal with concerns that the Chinese market has already been flooded with electric vehicles, which still only make up about 5 per cent of the country’s car sales.
About $60bn in state support for EVs, mostly in consumer subsidies, between 2009 and 2017 prompted hundreds of new companies to spring up. Many pocketed these sweeteners without ever manufacturing a car.
The withdrawal of much of this support in 2019 prompted a year-long downturn in the EV market.
However, sales have since been reinvigorated by the release in China of new, tech-laden offerings such as Tesla’s Model 3 and Xpeng’s P7.
The onus is now on Evergrande to prove it has a concept that can sell. “The market and opportunity is too big for them to abandon their investments now,” said Tu Le, founder of Sino Auto Insights, a consultancy.
Additional reporting by Emma Zhou in Beijing and Qianer Liu in Guangzhou