In Hefei, an industrial hub in the heart of central China, ultra-modern factories churn out electric cars and solar panels. Wide streets connect office buildings with beautiful parks. The subway will open at a fast pace.
However, local merchants at the construction materials market, which spans 10 city blocks in Hefei, are gloomy. Door retailer Wu Junlin closed two of his three stores and laid off all but one of his dozen or so employees.
“I’ve been doing this for 20 years. I’ve been doing it for many years, but this year is the worst,” he said, sitting in the last store with no customers in sight.
No place better represents the opportunities and vulnerabilities of China’s economy than Hefei.
Government-led growth in industries such as electric vehicles and solar panels has made China a global export powerhouse and made Hefei a model for other Chinese cities. But the national real estate decline has devastated the finances of millions of families and small businesses, including in Hefei.
Hefei and nearby towns have become hubs for EV manufacturing, with overall vehicle production nearly tripling since 2019 and now surpassing the state of Michigan. Hefei’s industrial policy has been very successful in fostering technology manufacturers, and the country’s central government has adopted the so-called Hefei model philosophy.
Now, with so many cities subsidizing electric car factories, the industry faces severe overcapacity and significant losses.
Xin Guobin, Vice Minister of China’s Ministry of Industry and Information Technology, said, “Some localities and enterprises still blindly launch new energy vehicle projects and duplicate them. Effective measures should be taken.” Last week’s news conference.
The Hefei model consists of using government funds to buy newly issued shares in cash-hungry manufacturers and startups. The authorities are also arranging loans at attractive interest rates from state-owned banks to finance the new factory.
Hefei has been transformed for more than two decades by the city government’s bets on companies such as flat-panel display maker BOE Technology Group and electric car maker Nio. When Nio was about to run out of cash in 2020, the Hefei city government injected $1 billion for a 24% stake, and state-run lenders injected another $1.6 billion.
Hefei, a provincial capital formerly located in a poor rural area, has soared up the income rankings of China’s cities. Local government executives, urban economists, and institutional investors are visiting Hefei to study the method.
Hefei has an $86 billion municipal holding company that pumps money into struggling but technologically advanced companies. The holding company, the fourth largest of its kind in China, buys its own shares cheaply when other investors don’t want them.
Sometimes these companies recover, like BOE Technology and Nio recovered after investing in Hefei. The city is also providing incentives to the suppliers and customers of these companies to relocate to Hefei, said Li Bo, an assistant professor at Peking University’s Guanghua School of Management.
“Hefei has a clear understanding of local industry. Government-led investment funds are tailored to the needs of businesses,” she said.
Hefei is at the top of several industrial supply chains. One-fifth of the world’s LCD displays for consumer electronics are manufactured in Hefei. The same goes for many of Lenovo’s laptop and notebook computers. Hefei produces one-tenth of China’s home appliances. The city government provided $2 billion of the $2.5 billion needed to build China’s first advanced computer memory chip factory.
Electric vehicle production in Hefei quadrupled last year and is expected to increase further this year as Volkswagen ramps up production at a huge new factory. Goshon High-Tech Company, an electric car battery maker partially owned by VW, has also built a factory in Hefei.
Other Chinese automakers are following suit. BYD, which competes with Tesla to become the world’s largest electric car maker, has nearly completed a $5.6 billion factory complex that will have the capacity to produce 1.3 million cars a year.
Just as Carnegie Mellon University fostered Pittsburgh’s technology renaissance, Hefei owes much of its success to its top engineering universities. Most of China’s top universities are located in Beijing or Shanghai. But leaders of the University of Science and Technology of China moved the university from Beijing during the turmoil of Mao Zedong’s Cultural Revolution, and in 1970 moved it to the relative peace of Hefei.
In 2005, Hefei’s new city leader, Sun Jinlong, pioneered Hefei’s focus on technology manufacturing. BOE Technology, based primarily in Beijing at the time, was struggling financially. The city persuaded the company to build a factory in Hefei, providing more than $1 billion in investment and financing.
BOE Technology’s subsequent corporate statements show it collected an additional $250 million in direct grants from the city from 2011 to 2016. BOE Technology is currently one of the world’s largest flat panel display manufacturers.
Hefei had powerful allies who facilitated its success. Li Keqiang, China’s second-highest official and prime minister until he stepped down about a year ago, grew up in Hefei.
During a visit to the city in 2015, Li promoted the “Made in China 2025” plan. The plan called for replacing many imported advanced industrial products with Chinese production by 2025, using an industrial policy similar to that of Hefei. Mr. Lee passed away in October.
Hefei still faces challenges. Automakers are having a hard time convincing executives and engineers to leave the glitz of Shanghai and Beijing for a quieter life in Hefei, despite the low cost of living. BOE Technology remains headquartered in Beijing.
However, Hefei’s biggest problem is housing.
Before China’s housing crisis hit Hefei two years ago, construction and real estate development were slightly larger than manufacturing in the city. Apartment buildings, office towers, and hotels rise above small farms left over from the city’s recent agricultural history.
That reliance on construction is now having a negative impact on Hefei.
According to China Index Academy, which provides real estate market data, the number of new apartments sold each month in Hefei has plummeted. By November, sales were down 45% from a year earlier.
Plunging sales have crippled debt-laden real estate developers’ ability to finance new projects. The total floor space of new projects last year plummeted by 57% from 2022.
When developers run out of money, they buy fewer land leases from the government. A cornerstone of China’s local government budgets, these lease sales typically cover half of Hefei’s city spending. Lease sales in Hefei fell 38% last year, putting government plans in jeopardy.
Small and medium-sized businesses claim that local governments, which had been large customers, have stopped placing orders.
“The government is running out of money and is empty,” said Tao Yingchen, who runs a flooring company in Hefei.
Some local workers complain that they lack the skills to compete for jobs. Companies like Nio and Volkswagen are increasingly relying on robots and other automation tools and hiring graduates from other regions’ best universities.
“The current employment environment is not very good,” said Hefei resident Xu Mingyi. Although he studied computer programming, he has yet to find a job in his field. He works as a ride-hailing driver instead. “These companies in Hefei need more talent than ordinary people can meet their requirements.”
Li Yu Contributed to research.