NIKKEI Asia China's underutilized factories fan export dump fears in U.S. and Europe As trade partners raise tariffs, Beijing faces pressure to keep workers on job CISSY ZHOU, Nikkei staff writer JUNE 4, 2024 06:00 JST

 

NIKKEI  Asia 

China's underutilized factories fan export dump fears in U.S. and Europe

As trade partners raise tariffs, Beijing faces pressure to keep workers on job

CISSY ZHOU, Nikkei staff writer

JUNE 4, 2024 06:00 JST

HONG KONG -- In mid-March, newlywed Lisa joined the production line at a just-built electric vehicle plant of Li Auto, a star of China's burgeoning EV industry. She hoped to help cover the couple's living expenses in Beijing, but she worked only a dozen days in April and three in May.

"We were told that our pure electric vehicle sales are weak due to the bad [business] conditions, so the company has to cut production," said the 27-year-old, who only gave her English name. She added that more than 1,000 workers were told they could either resign or wait it out on a minimum wage until things get better.

The pressure on Chinese authorities to keep Lisa and her colleagues on the job is threatening to worsen trade tensions between China and the West. With Chinese consumers unwilling or unable to buy all the goods produced by their country's industrial sector, the U.S. and European Union fear that Beijing will flout global trade rules and flood their markets with cheap state-subsidized exports.

The White House last month announced a tariff increase on Chinese EVs to 100%, as well as hikes on solar panels, semiconductors and certain steel and aluminum products, to counter "unfair trade practices." The EU is expected to soon conclude its own anti-subsidy probe that could result in new duties.

While countries in Southeast Asia and beyond are bracing for the ripples, China insists the Western concerns are "groundless." President Xi Jinping said in Paris in May that China's new energy sector "represents advanced production capacity, which not only enriches global supply and alleviates global inflationary pressures but also makes significant contributions to global efforts in addressing climate change and green transformation," according to state news agency Xinhua. "There is no such thing as 'China's excess production capacity problem.'"

But many industry players have a sense of urgency. At a recent meeting organized by the China Association of Automobile Manufacturers, Yao Xiaodong, secretary general of a "new energy vehicle" industry alliance in the Yangtze River Delta region, said Chinese EV manufacturers could "either go overseas or go bust."

China is now home to at least 77 automakers and 129 vehicle brands -- too many, experts say, even for the world's largest car market. As capacity utilization rates drop to levels not seen since the depths of the COVID-19 pandemic, how China and its companies confront the challenge could affect the fate of the domestic economy as well as fragile international relationships.

Officials seem aware China is walking a fine line. In May, a vice commerce minister held a closed-door meeting with experts in Shanghai and asked how to deal with the West's overcapacity complaints, one attendee said on condition of anonymity. "Experts said at the meeting that they think the fundamental issue with the claim is whether the large quantity of products sold to these markets is based on subsidies."

Like those of Li Auto, most Chinese EVs are produced in new facilities eligible for subsidies from local governments and cheap credit from state-directed banks. Coupled with sparks of innovation from some competitors, the perks have helped fuel the growth of the industry while also creating what many see as an unsustainable number of players in a country plagued by a property crisis that has sapped consumer confidence.

"Due to the incentives provided by local government subsidies, numerous companies have entered the green energy technology sector despite lacking the qualifications," said Chen Zhiwu, a professor of finance at the University of Hong Kong (HKU). "Without such subsidies, a significant portion of these companies would have faced financial collapse much earlier."

Even with workers like Lisa putting in fewer shifts, overcapacity warnings are flashing in the auto sector as well as other industries, such as steel. Official data shows the capacity utilization rate for auto factories plunged to 64.87% in the first quarter of this year, far below the benchmark of 75%. Private research from Gasgoo, a Shanghai-based automotive industry information service, showed the capacity utilization rate for new energy vehicles in 2023 was only around 47.5%.

Average utilization rates for power batteries and energy storage batteries fell below 60% and 55% respectively in 2023, according to a November communique by CEOs of China's leading battery manufacturers, including CATL.

Geely cars are loaded onto a ship at Ningbo Zhoushan port in China's Zhejiang province in 2019. The country's auto exports continue to grow.   © Reuters

Li Auto has responded by slashing its full-year sales target to somewhere between 560,000 and 640,000 cars, down from 800,000. It also began layoffs in May, letting go half the employees in its government relations and autonomous driving units, people with direct knowledge said. State media reported the company is laying off 18% of its total workforce. Li Auto did not respond to a request for comment.

But many say the government and industry will be loath to downscale, heralding a sharper clash with the West, which sees its pillar industries, particularly automobiles, in danger.

"Chinese companies will proactively lower prices and dump their products into the U.S. and EU, as developing countries cannot absorb such a large production capacity due to their limited purchasing power," HKU's Chen said. "So the U.S. and EU need to prepare for the shock in advance."

They are doing just that, with the tariffs and probes. In Germany late last month, U.S. Treasury Secretary Janet Yellen urged Europe to work with the U.S. to counter the problem. "If we do not respond strategically and in a united way, the viability of businesses in both our countries and around the world could be at risk," she said.

China's exports of the "new trio" -- EVs, lithium-ion batteries and photovoltaic products -- cracked 1 trillion yuan ($138 billion) in 2023, up 30% on the year. The growth rate of EV exports far exceeded that of domestic sales from 2020 to 2023, although the rates reversed in the first four months of this year, according to China Association of Automobile Manufacturers.

As things stand, China still exports less than 15% of all EVs manufactured in the country, but the growing ratio of cars it ships overseas is triggering Western fears of a coming deluge. China surpassed Japan as the world's largest auto exporter in 2023, driven by EVs as well as strong exports to Russia, which imported more than 900,000 Chinese vehicles as Western brands exited due to the war in Ukraine.

This is not the first time China's industrial capacity has become contentious. More than a decade ago, when Western countries complained about excessive production in sectors such as steel, the State Council led by then-Premier Wen Jiabao stressed the need to foster the service sector to boost growth. This paved the way for the rise of internet giants like Alibaba and Tencent.

But Wen's efforts, as well as "supply-side structural reform" later brought up by President Xi, were driven by the need for state-owned enterprises (SOEs) to enhance their profitability, said a senior fellow at a Beijing think tank who did not want to be named. "Beijing could not tolerate SOEs continuing to log losses. But for the EV sector, I don't think the government will pressure these private enterprises," he said.

A lithium-ion battery production line in Dongguan, in China's Guangdong province.   © Reuters

HKU's Chen said that despite supply-side structural reform, the fact is that industrial capacity has not declined but rather increased as China relies more on manufacturing to hone its technological capabilities and compete with the U.S. New EV factories are indeed being built, as even phone makers such as Xiaomi and Huawei have joined the race.

As margins decline amid fierce competition, coupled with weak domestic demand and the depreciation of the yuan against the dollar, Chinese companies have ever more motivation to export.

While Beijing is not expected to actively curb production, there are some things it might do to pacify the critics.

China could increase imports of European goods, such as Airbus planes, suggested John Gong, a professor of economics at the University of International Business and Economics in Beijing. He also said the government could urge companies to cool their price wars. And although China typically prefers that companies stay local to drive growth and employment, the authorities may more actively encourage Chinese manufacturers to build factories overseas.

Chinese President Xi Jinping has said that "there is no such thing as 'China's excess production capacity problem.'"   © Reuters

For some, a reckoning might be unavoidable.

A senior executive at a leading Chinese EV battery maker told Nikkei that there is "absolutely" an overcapacity issue, particularly among low-end battery producers. "It is a technology-intensive sector and the upgrade speed is very fast," he said, explaining that some excess capacity is necessary. But he said the consensus among insiders is that smaller players, even a few in the top 10, could close by the end of next year.

Such closures may trim some industrial fat, but they would contribute to other headaches for Beijing's policymakers as they prepare for the Communist Party central committee's third plenum in July, which will focus on "deepening" economic reforms.

Xi last week told officials to prioritize "high-quality full employment," especially for young workers. EVs and related industries employ millions of people.

Wan Guanghua, director of the Institute of World Economy at Fudan University, said some companies will inevitably go under, as cash-strapped local governments will not be able to prop them up. Yet he said the "fundamental challenge" for China is not overcapacity but "inadequate consumer spending."

Companies that have the wherewithal and "cannot generate sales at home will have no choice but to establish factories overseas" for survival, he said, echoing the Yangtze alliance chief's "go abroad or go bust" warning. But this, in turn, "will impact China's GDP growth and employment."

Going overseas is not a panacea, either. Disappointing sales in Europe have prompted China's Great Wall Motor to close its regional headquarters in Munich, while battery makers have also been scrapping plans to expand in Germany.

"The way out is to increase domestic consumption by raising residents' income," Wan said, "but this will be a long and painful process."

Lisa, the Li Auto worker, said she finds herself in a "real dilemma." She does not want to "fall into the trap" of resigning, which would absolve her employer of having to pay any compensation. "But I will try to find a job. Otherwise, I will be starving to death."