After three years of vigorous development in China's real estate market, it is widely believed that a 'frigid winter' has stretched to this sector since 2018. Real estate companies feel upset. Vanke, mainland China's second-largest commercial and residential real estate company by sales, even exposed the slogan "to survive" amid anxieties about "darkening skies over China's builders" in 2018.

Evergrande Group, another top developer in China, is also facing a debt crunch. However, besides going the traditional route of lowering retail prices, the real estate behemoth with tentacles stretching across China, had come up with a new plan of hedging against the risk. 

It has set out to join China’s carmakers and build its own new energy vehicles.

Although the entry by the developer in the automotive industry sounds unusual to the public, Evergrande is quite serious. Earlier this month, the company held a launch ceremony for NEVS 93, a pure electric vehicle based on the Saab Phoenix E platform and other technologies built on the now Chinese-owned Swedish company, in its Tianjin factory. 

NEVS stands for National Electric Vehicle Sweden, which was the name for a Chinese industry consortium that bought the Saab assets in 2012. Evergrande Health purchased 51% ownership of NEVS for 930 million U.S. dollars in January 2019.

The company previously claimed that it would have begun massive production of the car in June. 

“Due to the fact that high threshold exists in the automobile manufacturing industry, mass production is a major bottleneck faced by newly-established carmakers at home and abroad. At present, there are only a handful of newcomers that can truly achieve mass production in China,” Allen Zhang, an engineer at the state-owned carmaker Dongfeng Motor Corporation, told PingWest, “Evergrande takes only one year from stepping into the automotive industry to mass production, that’s not easy to accomplish.”

Everygrande's car making plan involved several business units within the group. Before going all-in on car making, Evergrande Health was a subsidiary unit focused on high-end medical and health management services. The entity under Evergrande charged with making the car is called New Evergy Automotive Group, according to company information. However, company insiders told PingWest that Evergrande’s high-tech department, which was founded in 2018, will also play a significant role in the R&D of the new energy vehicles in the future.

“To date, none of these newcomers is profitable, which means that in order to maintain the regular operation of the company, the pace of financing cannot be stopped,” said Chen Shaowei, director of quantitative research at Pistonint, a Guangzhou-based startup providing big data services to the automotive industry.

Li Shufu, Chairman and CEO of Geely, one of China’s largest carmakers, mentioned in a speech that the capital requirements for tapping into automobile manufacturing field have been much higher than before. “Without tens of billions or even hundreds of billions of investment, it is almost impossible to make a difference in this area.”

Even though Evergrande Group is experiencing the 'real estate winter,' as one of China's most profitable developers, it has accumulated enough wealth in the past decades. Its net profit reached RMB 72.21 billion ($10.5 billion), and total balance of cash, cash equivalents and restricted cash of the group was around RMB 204.21 billion (USD 29.7 billion), according to the company's 2018 financial report.

With a generally positive cash situation, Evergrande was able to go on a spending spree in car making within a short time frame.

In January 2019, the same month Evergrande Health became NEVS’ largest shareholder, it also paid RMB 1.06 billion ($154.4 million) for a 58% stake in lithium-ion battery maker Shanghai Cenat New Energy. Later that month, Evergrande Health formed a joint venture with Koenigsegg in order to use the Swedish supercar maker’s patents and brands, according to statements made by the company.

In March, Evergrande Health spent RMB 500 million ($72.8 million) to acquire a 70% stake in Netherlands-based in-wheel motor maker e-Traction. Two months later, it paid an undisclosed sum for British in-wheel motor company Protean.

That's not the whole of it, in September last year, Evergrande became the second largest shareholder of Chinese dealership company Guanghui Group, a move widely seen as Evergrande improving its footprint in car sales.

With its investments made this year, Evergrande has effectively become a full-cycle car making company, with complete manufacturing to sales capability. This is also similar to Tesla’s direct sales model and different from the way other brands sell their cars, through local third party dealerships.

Besides the Tianjin plant, the property titan has successively built factories in Shanghai, Guangzhou, and Shenyang. 

As one of the three major automobile manufacturing centers in China, Guangzhou has a robust industrial base. As early as 1998, Honda Motor has established a joint venture with local carmaker Guangzhou Automobile Group to produce motor vehicles.

On June 11th, Evergrande signed an agreement with the Guangzhou Municipal People's Government and has committed to invest RMB 160 billion ($23.27 billion) to set up three new factories in the southern metropolis.

Located in northern China, Shenyang, which was once considered as the cradle of the country's manufacturing industry, now remains the most critical heavy-industry base. The city has in recent years pushing heavily on new energy vehicles manufacturing. Shanghai, a city with surrounding areas investing heavily on the automotive industry, is also the place where Tesla is building a factory in.

Not all are welcoming to the Evergrande’s car making plan. Controversies surrounding the group suggest that the group actually aims to purchase land at a low price in the three cities mentioned above for future real estate development, and is not engaged in vehicle making.

"With the tightening of home purchase policies and the slowdown in economic growth, Evergrande's entry into the automotive industry may be a good opportunity for it to seek a new growth point," a customer manager of the Bank of China who provides services to automotive companies said. The manager, who wishes to remain anonymous for privacy reasons, added that both central and local governments provide financial incentives to new energy vehicle makers, which potentially include discounted land purchase price and expedited administrative processing.

Back in 2017, Evergrande Health promised a massive $2 billion investment in Faraday Future, a U.S.-based electric car startup founded by LeEco’s much controversial CEO Jia Yueting, which was mounting in debt at the time, with the intent of seizing control. However, Jia was reluctant to hand over his power, and did all he could to delay the seemingly inevitable, which further damaged the company financially. Consequently, the carmaker announced that it had settled the dispute with Evergrande and terminated any previous investment contract.

"Given the fact that Evergrande has acquired or invested in some second-tier manufacturers, it is difficult to create competitive cars. Whether its car will be accepted by Chinese consumers is yet to be verified." Chen said. The research director also mentioned that NEVS the company Evergrande acquired, has a weak sales volume in China. “If the group wants to seize a considerable share in China’s new energy vehicle market, great efforts should be taken in both R&D and marketing,” he added.

Evergrande, as well as other new energy vehicle makers, just had bad news last week. Starting June 26, Chinese governments on central and local levels have rolled back as much as 60 percent of the previous subsidies on electric vehicles.

In the meantime, data from China Association of Automobile Manufacturers showed that about 1.3 million units of new energy vehicles were sold in China last year, a jump of 61.7% from 2017. But the market growth is expected to slow down distinctly in the coming years after the cut in government subsidies.

“This is destined to be a long process, and the real estate company have to adapt to extended payback periods. Fortunately, through its car-making action, Evergrande acquired a large amount of land in first-tier cities such as Guangzhou and Tianjin, so even if it fails in the future, the land property is still worthy,” said Chen.