Trying To Beat Tesla, Evergrande's Car Firm Is Now Struggling To Survive

Back in the spring of 2019, one of the billionaire founders of China Evergrande New Energy Vehicle Group Ltd. had vowed to overtake Tesla Inc. in the next three to five years as the world’s biggest electric car maker. As a result, the company's stock has gone from boom to bust, and it is struggling to survive these days.

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As a result of Hui Ka Yan's warning last month that it would need to stop production at its Tianjin factory if new funding was not secured, Evergrande NEV, the brainchild of the beleaguered property developer China Evergrande Group, is looking for a lifeline after last month. Investors are hesitant to take up Evergrande NEV, according to people familiar with the discussions, because some of its terms deter them. 

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As Evergrande NEV has effectively been paralyzed by the Chinese government and has not yet manufactured any vehicles, many prospective investors are focusing on the company's carmaking license. That license is a core asset as China tries to limit the number of new entrants into the overcrowded market for electric vehicles. Those people, who asked not to be identified because the negotiations are private, said that concerns that red tape would complicate the transfer of the license are discouraging some parties.

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Many potential new investors, according to the sources, don’t agree with Evergrande NEV’s request that some members of the management team that have been involved in car production stay on at the company. In particular, if the investors are aspiring EV makers of their own, they prefer to start a new company from scratch and to not inherit legacy staff.

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A request for comment was not immediately responded to by representatives from Evergrande NEV.

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Despite having many billions of dollars behind it, Evergrande NEV's difficulties illustrate the difficulty of manufacturing cars at scale, even if the company has many billions of dollars invested in it. Even though the automaker has made grand proclamations for years, it has only delivered about 900 units of its long-delayed flagship model. According to an exchange filing made by the company last month, it is seeking financing of over 29 billion yuan ($4.2 billion). However, the company did not give any information regarding when or where these funds would be raised. Despite the fact that Evergrande NEV has received a new capital injection, the company still expects to have cumulative negative cash flow of 5 billion yuan to 7 billion yuan between 2023 and 2026, no matter what happens.

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Since the company's parent's record has been disastrous, it hasn't been much help to the company's own struggles. 15 months after Evergrande first defaulted on its public dollar bonds, the world's largest property developer, has recently unveiled details of its multi-billion dollar restructuring plan that will require offshore creditors to exchange their debt for new securities, as part of its multi-billion dollar restructuring plan.

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Furthermore, the electric car market in China is also getting increasingly competitive as time goes by. In addition to the existing offerings by established companies such as Tesla and China's BYD Co., which has become the world's second-largest electric car manufacturer after Elon Musk's pioneer, new models from Nio Inc., Xpeng Inc. and Li Auto Inc. are flooding the market as well, adding to existing models from established companies such as Tesla and Xpeng Inc. As a result of that, coupled with the recent lackluster consumer demand following Covid, the Chinese electric car market has been sparked with a price war, with some electric car variants being discounted by up to 15%.

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A stake in National Electric Vehicle Sweden AB, a Swedish electric vehicle company and owner of Saab Automobile assets, was acquired by Evergrande NEV in 2019 as a means of securing its license to manufacture cars. After hundreds of companies were lured into the electric vehicle sector by subsidies and tax incentives, Chinese officials are now stepping up scrutiny over licenses of such type. However, they left a trail of bankruptcies, deserted factories, and government subsidies for EVs to their detriment. Therefore, any transfer of licenses or changes in ownership are tightly controlled, and it is this well-defined process that is weighing heavily on investors' minds, according to people familiar with the matter.

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As part of any transfer of the automaking license, Beijing would have to give its approval, which means that the recipients would have to prove they have the financial and technological capability to manufacture the automobile, as well as proving that they meet some stringent requirements regarding their sales records. 

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In spite of the fact that officials in Guangdong province where Evergrande is based, were open to new investors joining the company in order to restart the production process at Evergrande NEV’s Nansha plant in Guangzhou, they also stated that the fact that the license was registered in Tianjin, a city in the northeastern region where Evergrande NEV is located, may make things more complicated. Located in Tianjin, the plant has a production capacity of around 40,000 cars annually, but any new investors would have to recover at least 80% of that capacity, which would take a considerable amount of time and money.

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The creditors of China Evergrande Group, who have soured their debt, are also critical to maintaining Evergrande NEV's position above water. A restructuring proposal released in March offered them a chance to convert some of their soured debt into equity instruments related to Evergrande NEV. There are also compulsory convertible bonds in those equity instruments which will be converted into shares of the electric car unit after two years after the restructuring has been completed. Since the conversion price for Evergrande NEV is 20% higher than its last trading price of HK$3.20, not only is it about to make a crucial difference to creditors' recovery prospects, but its future prospects will also make a vital difference to those prospects.

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Fresh investors are also considering whether there would eventually be any financial gain for them as a result of Evergrande NEV's debt amounting to about 7.5 billion yuan, the people said, since Evergrande NEV's debt amounts to about 7.5 billion yuan.