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China's riddle: How can EV sales soar while profits shrink?
Yang Jian | 2017/10/20

SHANGHAI -- How can your profits plunge while your EV sales soar?

Jianghuai Automobile Co.¡¯s management is doubtless pondering that riddle. 

The state-owned company attracted lots of media attention last year when it abruptly transformed itself from truckmaker to EV producer. 

Success seemed assured after JAC formed a partnership with Volkswagen to produce EVs. Alas, it has ended in tears.

The automaker last week warned investors that net profits for the first nine months fell 80 percent. But JAC is not the only company whose bet on EVs left it with a bitter taste.

In fact, China¡¯s bus manufacturers are in crisis. Enticed by generous government subsidies, they ramped up EV production and enjoyed robust profits. Now they¡¯re going bust.

Four leading electric bus makers have posted plunging profits in 2017. 

One of those unfortunates is Ankai Automobile Co., which is headquartered in the east China city of Hefei where JAC also is. For the first nine months, the company lost 89 million yuan ($13 million), down from a net profit of 26 million yuan a year earlier.

Two other major electric bus makers, Zhongtong Automobile Industry Group and Xiamen King Long Automotive Industry Co., each reported that net income for the first six months declined more than 76 percent. 

And China¡¯s largest bus manufacturer, Yutong Group Co., reported that its net profit for the first six months slumped 35 percent. 

All four companies blame the dismal results on Beijing¡¯s decision to cut subsidies as much as 23 percent. Because those incentives can range up to 360,000 yuan per bus, it¡¯s easy to see why profits plunged.

But a second factor is working against JAC. Distracted by fat EV subsidies, the company failed to invest in its portfolio of gasoline-powered passenger vehicles.

That proved to be a big mistake. The company was doing fine as recently as 2015, when deliveries jumped 32 percent on explosive sales of three small crossovers. That year, net profits surged 60 percent. Life was good.

But as JAC expanded its EV lineup, its conventional products went stale. Rivals such as Geely and GAC introduced a wave of new crossovers, and JAC¡¯s sales ran out of steam.

Despite China¡¯s red-hot market for crossovers, JAC¡¯s sales in the segment have plunged 55 percent this year.

Another example is BAIC Motor Group, which introduced 10 EV models over the last four years. In 2016, it became China¡¯s largest producer of EVs, with sales exceeding 51,500 vehicles. 

But Beijing Auto¡¯s pursuit of EV sales consumed precious resources that otherwise could have been spent on conventional vehicles. 

The consequences were brutal. In the first six months, Beijing Auto¡¯s sales of gasoline-powered vehicles plummeted 44 percent, and the company suffered a whopping loss of 3.2 billion yuan. 

Foreign automakers are now nervously eyeing China¡¯s treacherous EV market.

Except for Nissan and General Motors, foreign automakers have yet to assemble EVs in China. They are skeptical about consumer demand for EVs without the support of big subsidies, and rightly so. 

But they don¡¯t have any choice. Beijing has enacted a carbon credit program that will force them to produce EVs in China starting in 2019. Moreover, the government will phase out EV subsidies in 2020. 

So foreign automakers soon will confront the same riddle as their Chinese peers. Without subsidies, how do you make money selling EVs to price-sensitive consumers?

In recent years, China has been a reliable cash cow for global automakers squeezed in other markets. Not anymore.

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