Chinese automakers are facing mounting financial pressure, with the ongoing price war placing significant strain on their balance sheets. A recent analysis by the Financial Times reveals that over a third of publicly listed car manufacturers in China ended 2023 with current liabilities exceeding their current assets.
This financial challenge highlights how major carmakers are relying on aggressive cost-cutting strategies, including squeezing suppliers, to maintain their working capital and fund their fight for market share. With heavy discounting becoming common, the industry’s liquidity position is deteriorating.
Leading electric-vehicle (EV) maker BYD is the most affected, with its working capital in the most negative territory. Other carmakers facing similar issues include Geely, Nio, Seres, and state-backed companies like BAIC and JAC. By the end of 2023, the total net current assets of 16 major listed Chinese carmakers dropped to RMB 104.3 billion ($14.5 billion), a 62% decrease from the peak of RMB 290.5 billion in mid-2021.
Yin Xinchi, an analyst at Citic Securities, warned that this decline in net current assets signals a rising cash consumption rate, posing significant liquidity risks. “With the current downward trend, China’s auto industry may enter an industry-wide elimination phase by 2026 at the latest,” he said. “Some companies will fail due to liquidity crises during this period.”
The Chinese government is growing concerned about the state of the market. In a recent meeting with 16 major domestic carmakers, government officials expressed concerns over aggressive discounting and delayed supplier payments. The practice of selling brand-new cars at discounted prices as “zero-mileage” second-hand vehicles was also criticized.
In response, companies like BYD, Geely, Xiaomi, and state-backed GAC and FAW have committed to settling bills within 60 days to ensure supply chain stability.
However, analysts from Citi highlighted that only a few Chinese EV makers, including BYD, Li Auto, Xpeng, Leapmotor, and Changan, have enough net cash to handle the decline in cash reserves resulting from the implementation of shorter payment cycles.
Another analyst, Nigel Stevenson from GMT Research in Hong Kong, pointed out BYD’s reliance on working capital rather than traditional debt to finance its growth. Stevenson noted that BYD’s expansion is funded primarily through working capital, with the company delaying payments to suppliers to maintain its cash flow. As a result, BYD’s debt levels appear lower than they actually are.
At the end of 2024, BYD’s current liabilities of RMB 496 billion were greater than its current assets of RMB 371 billion, widening its working capital deficit to RMB 125.4 billion. This is a 36% increase from two years earlier, when the price war began. In comparison, BYD’s smaller rivals, including Geely, Nio, Seres, BAIC, and JAC, collectively recorded a working capital deficit of RMB 17.8 billion.
BYD’s financial practices have recently come under scrutiny, especially after Wei Jianjun, chairman of rival Great Wall Motor, called for an audit of all major domestic carmakers. Wei likened the situation in China’s auto sector to the financial troubles faced by real estate giant Evergrande, warning that the industry could be on the brink of a debt crisis similar to the one that shook China’s property market.
