The Subsidy Scandal Shaking China's EV Giants: BYD and Chery's Risky Road Ahead

The electric vehicle (EV) revolution in China is hitting a major speed bump. Recent audits by the Ministry of Industry and Information Technology (MIIT) have exposed a $121 million subsidy scandal involving two industry titans: BYD and Chery. This isn't just about financial missteps—it's a seismic shift in regulatory enforcement that could redefine profitability for the entire sector. Let's dive into the risks, the implications, and what investors must do now.

The Audit Bombshell
The MIIT's 2025 audit revealed that BYD and Chery improperly claimed subsidies for over 12,000 vehicles sold between 2016 and 2020. Chery alone accounted for 8,800 vehicles ($240 million) due to missing sales certificates and “zero-mileage” fraud—where unsold cars were artificially registered as sold to qualify for rebates. BYD's 4,900 vehicles ($143 million) were flagged for similar issues, though specifics remain opaque. While neither company faces fraud charges yet, the writing is on the wall: Beijing is cracking down.

Why This Matters: The Regulatory Hammer Has Fallen
China's EV boom was fueled by subsidies—now phased out nationally but still lingering in regional policies. The audit isn't just a cleanup effort; it's a warning. Companies that gamed the system to inflate sales and profits are now targets. The MIIT's focus on missing documentation and fraudulent mileage claims exposes a rotten core:
- Overcapacity and Price Wars: With EVs flooding the market, automakers cut prices to survive, squeezing margins already thin from supply chain costs.
- Cash Reserves at Risk: BYD's net cash reserves have dropped to 10% of revenue (vs. 15% in 2020), while Chery's liquidity is even shakier. If forced to repay subsidies, these firms could face liquidity crises.

The Investment Crossroads: Short the Weak, Back the Strong
This isn't just about penalties—it's about survival of the fittest. Here's the playbook:

1. Avoid Subsidy Reliance: Firms like BYD and Chery, which thrived on government handouts, now face a reckoning. Their shares are prime candidates for shorting—especially if repayment demands materialize.

2. Focus on Governance: Companies with clean records and strong compliance—NIO, XPeng, and Li Auto—deserve a second look. Their higher cash reserves (NIO's cash-to-revenue ratio hovers around 20%) and focus on innovation (e.g., XPeng's autonomous driving tech) position them to dominate post-subsidy markets.

3. Watch for Consolidation: Smaller players will struggle. Look for M&A activity or bankruptcies, which could benefit giants like Tesla (already dominating China's premium EV market) or Hyundai, which is aggressively expanding its local partnerships.

4. ESG Risks Ahead: ESG-conscious investors may shun BYD and Chery, given reputational damage. This could hurt export potential and partnerships with Western firms wary of regulatory blowback.

The Silver Lining: A Healthier EV Market
While the scandal spells short-term pain, it's a long-term win for the industry. Stricter scrutiny will:
- End “Zero-Mile” Fraud: Practices like offloading unsold cars to traders will fade.
- Force Innovation Over Inflation: Companies must compete on quality, not subsidies.
- Strengthen Global Competitiveness: A leaner, more transparent sector will better challenge Tesla and European rivals.

Final Take: Proceed with Caution, But Stay Bullish on EVs
The EV sector isn't dying—it's being reborn. For now, steer clear of subsidy-dependent players. Instead, allocate to firms with ironclad compliance and innovation pipelines. If you must bet on BYD or Chery, wait for clarity on repayment demands and cash reserve levels. The road ahead is bumpy, but the winners will reshape the future of mobility.

Invest wisely—and keep your eyes on the road ahead.