Being able to sell what you make at a high margin is considered good business but some phony Chinese makers have discovered a better business model — fake production and sales in exchange for government subsidies.
Corporate fraud is a major risk for investors in Chinese firms.
The electric car saga, in which numerous carmakers cheated money out of the government, is a case in point.
Earlier this month, five e-bus makers — Suzhou Gemsea, Suzhou Kinglong, Wuzhoulong, Chery Bus (Guizhou) and Shaolin Bus — were named and punished for applying for subsidies without actually producing the vehicles.
Suzhou Gemsea, for instance, forged records of everything from material and parts purchases to production.
Most of the “sales” were booked to connected companies such as subsidiaries.
Convicted firms are required to return all subsides and pay a 50 percent fine.
Some are no small fry.
Suzhou Kinglong is a big e-bus maker, with a market share above 7 percent, according to Morgan Stanley.
E-bus is said to be the most problematic area in the e-vehicle industry.
Generous subsidies as high as one million yuan (US$150,000) per vehicle have led to rampant fraud.
To weed out similar attempts in the future and clean up the sector, heavy penalties are imposed.
Stringent punishment is meted in the worst cases such as that of Suzhou Gemsea.
The company will lose its car production license, so it’s game over for them.
Suzhou Kinglong was fined 260 million yuan, five times its profit in the first half, according to Caixin magazine.
The government has been keen to jumpstart the e-car industry, offering supportive policy including purchase subsidies and giving priority to license applicants.
The policy worked and sales exceeded 300,000 units last year.
But the incentives also has downside risks — forgeries are only some of them.
Rather than lower their production cost and improve the quality of their products, some makers have become overreliant on subsidies.
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