On the outskirts of Chongqing, western China’s largest city, stands a large symbol of the country’s abundance of car factories. It is a complex of gray buildings, almost a square kilometer in size. The thousands of employees who used to work there have moved. The crimson loading docks are closed.
The facility, a former assembly plant and engine factory, had been a joint venture between a Chinese company and South Korean giant Hyundai. The complex opened in 2017 with robots and other equipment to make gasoline-powered cars. Hyundai sold the campus late last year for a fraction of the $1.1 billion it took to build and equip it. The unmown grass at the site has already grown knee-high.
“It was all highly automated, but now it’s abandoned,” said Zhou Zhehui, 24, who works for a rival Chinese carmaker, Chang’an, and whose apartment looks down on the former Hyundai complex.
China has more than 100 factories with the capacity to build nearly 40 million combustion engine cars per year. That’s roughly twice as much as people in China want to buy, and sales of these cars are falling rapidly as electric vehicles become more popular.
Last month, sales of battery-electric and plug-in gasoline-electric hybrid cars together surpassed those of gasoline cars for the first time in China’s 35 largest cities.
Dozens of petrol vehicle factories are barely running or have already shut down.
The country’s auto industry is at the beginning of an EV transition that is expected to last years and ultimately claim many of those factories. How China handles that long-term change will affect its future economic growth, since the auto sector is so big and could transform its workforce.
The interests are also great for the rest of the world.
China, the world’s largest car market, became the largest exporter last year, surpassing Japan and Germany. Chinese car sales abroad are exploding.
Three-quarters of China’s exports are gasoline-powered models that the domestic market no longer needs, said Bill Russo, an electric car consultant in Shanghai. These exports threaten to cripple producers elsewhere.
At the same time, Chinese electric vehicle manufacturers are still investing heavily in new factories. BYD and other carmakers are expected to introduce more electric models at the opening of the Beijing auto show on Thursday.
Electric car sales in China are still growing. But the growth rate has halved since last summer as consumer spending in China has fallen due to a housing market crisis.
“There is a slowdown trend, especially for pure electric vehicles,” said Cui Dongshu, secretary general of the China Passenger Car Association.
China also has excess capacity in electric vehicle production, although less than that of gasoline cars. Price reductions for electric vehicles are common. Li Auto, a fast-growing Chinese manufacturer, cut its prices on Monday. Tesla did the same a day earlier, reporting a big drop in profit for the first three months of this year on Tuesday. BYD, the market leader in China, implemented price cuts in February. Volkswagen and General Motors have also cut EV prices in China this year.
Automakers with factories close to the Chinese coast export gasoline-powered cars. But many of the threatened factories are in cities deep within the country, such as Chongqing, where high transportation costs to the coast make it too expensive to export.
Nearly all electric cars in China are assembled in newly built factories, which are eligible for subsidies from municipal governments and state-owned banks. It is cheaper for car manufacturers to build new factories than to convert existing factories. The result is enormous overcapacity.
“The Chinese auto industry is experiencing a revolution,” said John Zeng, director of Asia forecasting at GlobalData Automotive. “The old internal combustion capacity is dying.”
Sales of gasoline cars fell last year to 17.7 million last year from 28.3 million in 2017, the year Hyundai opened its complex in Chongqing. That drop is equal to the entire European Union auto market last year, or the entire annual production of cars and light trucks in the United States.
Hyundai’s sales in China have fallen 69 percent since 2017. The company put the factory up for sale last summer, but no other automaker wanted that. Hyundai eventually sold the land, buildings and much of the equipment back to a municipal development company in Chongqing for just $224 million, or 20 cents on the dollar.
The municipal corporation said this year, while seeking insurance locally, that it had no new tenant.
Other multinational automakers have scaled back production in China. Ford Motor has three factories in Chongqing that have been operating at a small fraction of capacity for the past five years.
Hyundai is one of the few, mostly foreign, automakers that have completely halted production in some locations, although the company still has three factories in China.
“There does not appear to be a concerted effort to eliminate excess capacity, but rather a shift from foreign to Chinese ownership,” said Michael Dunne, former president of General Motors Indonesia.
The long-standing benchmark is that auto plants must operate at 80 percent or more of capacity to be efficient and make money. But with new electric car factories opening and some older factories closing, industry-wide capacity utilization has fallen to 65 percent in the first three months of this year, down from 75 percent last year and 80 percent or more before the Covid 19 pandemic. The Chinese National Bureau of Statistics.
Without a major export burst last year, the sector would have been operating even further below full capacity.
Chinese manufacturers, many of which are partly or wholly owned by city governments, are reluctant to reduce production and cut jobs. Chang’an, a state-owned carmaker, has a factory just a 20-minute walk along pink bougainvillea-lined alleys from the former Hyundai complex. The many hectares of the factory’s parking lot were completely full of unsold cars on Sunday.
Cities that are particularly dependent on the production of gasoline-powered cars, such as Chongqing, face an employment dilemma. Assembling electric vehicles requires significantly fewer workers than making gasoline-powered cars because EVs have far fewer components.
Workers with strong technical backgrounds, especially in robotics, can easily and quickly find jobs if they are laid off, auto workers in Chongqing said in interviews. But semi-skilled workers – including those who are older and have not undergone training to develop their skills – are now finding it harder to find work.
Mr. Zhou said that when he applied for his job at Chang’an, “it was fierce competition.”
Yet today, it is extremely difficult to find unemployed former Hyundai workers in Chongqing, even near the former factory.
Most factory workers in China are migrants who grew up in rural areas and have few ties to the communities where gasoline-powered cars are built. So they can easily move to other cities or industries if they lose their jobs.
Still, there is an air of gloom hanging over Chongqing’s auto industry as demand declines and less skilled workers have fewer opportunities to earn overtime. Hyundai’s signage is still visible in many places in the former factory, but a large shadow on the front gate shows where an optimistic slogan used to hang: “New thinking, new possibilities.”
Li you research contributed.