Carmaker Debt Stress Deeply Clouds China’s Growth Outlook Ahead

Beijing’s tighter oversight of vicious price competition in the automotive sector is expected to increase borrowing pressure on mainland carmakers and accelerate the exit of weaker, debt-laden players amid softening consumer demand, according to S&P Global Ratings.

The warning is likely to deepen bearish sentiment surrounding mainland China’s more than 100 car assemblers, many of which have been at the forefront of global electric vehicle (EV) technology and production.

“Financially fragile players that struggle to keep pace with government guidance will exit the market or be absorbed,” S&P said in a research report written by analysts Stephen Chan and Claire Yuan released on Wednesday.

“Larger players with continuously upgraded products and stronger balance sheets will likely gain share. A leaner, more disciplined sector should shake out, albeit with likely failures and lost capital along the way.”

Since mid-2025, Beijing has urged carmakers to pay suppliers promptly in an effort to rein in the prolonged discount wars that have engulfed nearly every player in the world’s largest car and EV market.

Chinese manufacturers had previously relied on extended payment cycles to preserve cash, allowing them to continue investing in research and development while cushioning the impact of aggressive price cuts aimed at undercutting rivals.

In February, the China Association of Automobile Manufacturers, a government-backed industry group, said the 17 major assemblers it examined had taken an average of 54 days to pay suppliers since June, with four settling payments in fewer than 50 days.

Previously, some carmakers took more than 300 days to pay vendors.

“This shift is hitting carmakers’ working-capital profiles,” S&P said. “We believe the transition to this shortened payment schedule will continue to play out over the next six to 18 months.” According to the report, higher leverage and tighter liquidity were likely to curb the industry’s appetite for aggressive promotions and deep discounts.

“They are likely to be more cautious and avoid engaging in price wars, even as demand weakens,” S&P said. “This, together with mounting raw material cost inflation, has led to price increases in some car models this year.”

The gradual rollback of purchase subsidies and tax incentives contributed to a 17.4 per cent year-on-year decline in mainland car sales in the first quarter, according to data from the China Passenger Car Association (CPCA).

Earlier forecasts had already pointed to a weaker outlook. Deutsche Bank projected a 5 per cent decline in China’s car sales this year, while UBS forecast a 2 per cent drop, citing softer demand and reduced government support.

“Ironically, price wars caused some underperforming players to exit in the past three years, and now an end to price competition would also result in some failures,” said Gao Shen, an independent analyst in Shanghai.

“After all, the Chinese car market seems to be overcrowded, despite companies’ efforts to innovate on products and services to lure consumers.”

Sales of pure EVs on the mainland accounted for 56 per cent of the global total in the first quarter, while deliveries of plug-in hybrids represented more than three-quarters of the world’s total, according to the CPCA.

Stephen Dyer, Greater China co-leader and head of Asia automotive practice at AlixPartners, said last year that only 15 Chinese EV brands, or 10 per cent of the country’s total, would turn a profit over the next five years, as price competition continued to squeeze profit margins.

Carmakers that sold fewer than 1,000 units a month were expected to exit the market in the near term, according to Dyer.