Introduction
As a newcomer to the automotive industry, Evergrande has missed too many golden opportunities, and whether it can successfully transition to new energy within the next ten years remains a big question mark. The primary challenge facing Evergrande Auto is to adjust its mentality regarding new car production, launch mass-produced cars as soon as possible, and even create best-selling models to build confidence and determination for the transition.
“At times of difficulty for a company, everyone should remain composed.” On November 4th, at an internal meeting of Evergrande Group, Chairman of the Board of Directors, Xu Jiayin, encouraged his staff. Currently, Evergrande is doing everything it can to rescue itself and navigate through this crisis.
Evergrande Auto was officially launched in 2016, and in 2019, it began to expand and invest heavily, accumulating a total investment of 47.4 billion yuan. The industry joked that although other new forces in the car industry lack funds, Evergrande does not.
However, unforeseeable events do happen. In September of this year, Evergrande suffered a sudden debt crisis with a debt of up to $800 billion. Coupled with the media frenzy, the giant Evergrande seemed to be collapsing at any moment, and Evergrande Auto naturally went into a halt.
Will Evergrande collapse? The answer is negative, as related higher authorities assessed and concluded that the problem with Evergrande is “manageable.” This indicates that Evergrande does have a chance to save itself.
On October 22nd, at the Evergrande Group’s special meeting on resuming work and production, Xu Jiayin announced the company’s three strategic decisions for risk resolution and self-rescue: first, to firmly achieve resumption of work, production and delivery of housing; second, to comprehensively implement sales of existing properties and drastically reduce the scale of real estate development; third, to achieve the transition from the real estate industry to the new energy automobile industry over the next 10 years.
According to the diagnosis of relevant departments on Evergrande’s problem, blind expansion in the past few years is the crux of the matter, which is characterized by Evergrande Auto’s intensive investment. However, from the third self-rescue strategy, Xu Jiayin’s investment in the new energy vehicle business does not seem to have any regret, but instead has strengthened his determination towards the transition.
How to Survive the Crisis
Paying off debts is the top priority for Evergrande. With debts of up to 800 billion yuan, it is difficult for ordinary people to imagine, which is also one of the reasons why Evergrande’s problem has been magnified. However, the impact of this debt on Evergrande, as a massive enterprise, may not be as significant as it appears. According to Evergrande’s financial report, in 2020, it achieved contracted sales of 723.25 billion yuan, an increase of 20.3% YoY, and completed the annual sales target by 111%. Sales receipts totaled 653.16 billion yuan, with an annual sales receipts ratio of 90.3%, up by 12 percentage points YoY. Evergrande stated that the contracted sales and sales receipts broke the historical records of the same period within the Evergrande Group.Actually, in March last year, Evergrande began to implement the development strategy of “high growth, control of scale, and debt reduction”. Therefore, it can be seen that, firstly, Evergrande has already foreseen the problem of debt, so this crisis cannot be regarded as a “landmine”; secondly, Evergrande’s adjusted strategy has been effectively executed.
Looking at Evergrande’s 2020 annual report and the development strategy and execution degree before and after that, it is difficult to define Evergrande as a troubled company if we exclude the debt crisis. On the contrary, both revenue and returns reached new highs, indicating that the company is still in a period of rising development.
Zou Lan, the director of the Financial Market Department of the People’s Bank of China, said that the total asset scale of Evergrande Group exceeds 2 trillion yuan, and financial debts account for less than one-third of total debts. Creditors are relatively scattered, and the risk exposure of individual financial institutions is not significant. Overall, the risk to the financial industry is controllable.
On November 4th, Xu Jiayin said, “Real estate is a capital-intensive industry that requires a large cash flow.” This is a response to the “huge” debt of 800 billion. For this reason, Xu Jiayin also shared several pieces of data. From 2016 to the first half of 2021, Evergrande’s major expenditures totaled 5.01 trillion yuan, including 2.25 trillion yuan of principal repayments.
Whether it is the determination of relevant departments that the debt crisis of Evergrande is controllable, or Xu Jiayin’s assertion that Evergrande has the ability to repay its debts, the negative impact of this crisis has already occurred and has affected Evergrande’s normal operations. To solve the problem thoroughly, the primary task is to make the company run normally, and other issues can be addressed later.
On November 4th, the Hong Kong Stock Exchange disclosed documents showing that Evergrande’s shareholding in Shengjing Bank decreased from 49.59% to 19.85%, with a total realization amount of 11 billion yuan. Evergrande stated that the company’s liquidity problems have caused significant negative impacts on Shengjing Bank. Introducing state-owned enterprises as major shareholders can help stabilize the bank’s operations and also contribute to the appreciation and value preservation of the remaining equity of Shengjing Bank held by Evergrande.
Regarding the current debt crisis, Xu Jiayin said, “We must go all out to resume work and production, deliver houses, restore sales, and repay overdue payments.” On November 3rd, Evergrande Group’s official WeChat account released a message stating that from July to October of this year, the company completed the delivery of 546 batches of housing, involving 184 different projects and 57,462 homeowners.
Evergrande Group pointed out that “delivering houses” is the top priority at present, and all employees of the group are committed to ensuring project construction with the greatest determination and efforts to ensure quality and quantity delivery of the properties.
Currently, Evergrande’s resumption of work and production is being gradually promoted across the country, and the resumption ceremony of multiple projects has been held in various regions. Among them, about 40 projects under construction in the Guangdong region have resumed work and production, and it is expected that 31 projects will be delivered to homeowners by the end of this year and all projects will be delivered by mid-next year. Evergrande projects in Chongqing, Shaanxi, Anhui, Guizhou, Shanxi, Suzhou and other places has begun to resume work and production and all projects are progressing smoothly, safely, and orderly in accordance with the construction plan.
The Little Five of Mass Production of Hengchi, Outlining the Big FutureThe three strategies proposed by Xu Jiayin are not only the current self-help means of Evergrande, but also describe the future look of Evergrande: in ten years, Evergrande will establish an industrial pattern dominated by new energy vehicles and supplemented by real estate. In Xu Jiayin’s mind, the debt crisis is only a small episode at the current stage, and continuing the transformation to new energy vehicles is the most important thing.
On October 11th, Evergrande Auto held a strategic partner conference at its Tianjin base. According to reports, nearly 200 executives from strategic partners such as Bosch, Continental, Hitachi, and Hella attended the conference, as well as leaders of the Tianjin Binhai New Area and Evergrande Auto management.
At the conference, Liu Yongzhuo, President of Evergrande Auto, announced the latest progress in Evergrande’s car-making initiative. He said that Evergrande Auto had launched a three-month offensive, and its first production car, the Hengchi 5, would be rolled off the line in early 2022. To this end, Evergrande has mobilized core R&D teams and technical elites from Shanghai, Guangzhou, Shenzhen, and other places to support it, and its Tianjin base has been transformed into a leading Industry 4.0 high-end smart factory in China.
In addition to the soon-to-be-launched Hengchi 5, several other models are also actively being prepared for production. Since this year, Evergrande Auto has successively completed the trial production of Hengchi 1, 3, 5, 6, and 7, as well as winter testing, summer testing, and plateau testing.
On October 30th, the media visited Evergrande’s Tianjin base. According to workers on the production line of Evergrande Auto in Tianjin, the Hengchi 5 has entered the trial production stage, the basic functions of the vehicle are complete, the interior is intact, and the only thing left is road access permit for volume production.
Evergrande Auto is only a step away from mass production. Starting with the Hengchi 5, Evergrande will officially enter the era of car-making.
The outside world is generally concerned about whether Evergrande can mass-produce the Hengchi 5, but the electric force reporter believes that this is not a problem. The key to Evergrande Auto lies in where it will go next. The crisis that erupted this time undoubtedly sounded an alarm to Xu Jiayin: “Buying” cannot make cars, but instead will drag the whole Evergrande into the abyss.
In June 2019, Evergrande Auto announced the acquisition of global wheel hub motor leader Protean Electric in a high-profile manner. However, according to foreign media reports, the electric vehicle manufacturer Bedeo has acquired Protean Electric from Evergrande. On November 4th, Evergrande New Energy Auto issued a statement confirming the news, but did not disclose the transaction terms.
Whether it is from the outbreak of this debt crisis or from the resale of Protean Electric, it is obvious that Xu Jiayin should rethink the issue of car-making path. And perhaps the optimal solution is close at hand – new car-making.Since 2014, a new force in car manufacturing has emerged, and more than 7 years have passed. Despite the demise of a large number of them, a small part of them have survived tenaciously. For example, NIO has not only successfully stood out from the crowd, but has also become one of the most powerful forces driving the global new energy forward.
As a newcomer in car manufacturing, however, Evergrande has missed too much golden time. Whether it can successfully transform to new energy in the next decade is still a question mark. The primary problem facing Evergrande Auto is to correct its new car manufacturing posture, launch mass-produced cars as soon as possible, and even create popular models to establish the confidence and determination to transform.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.