Zeekr (ZK) and the Shadow of Sales Inflation: Assessing Long-Term Risks in China's EV Sector

The Chinese electric vehicle (EV) sector, once a beacon of growth and innovation, now faces a reckoning. At the heart of this turmoil is Zeekr (NYSE: ZK), a brand that has risen rapidly in the EV hierarchy, only to be ensnared in allegations of sales inflation. The implications of these accusations extend beyond Zeekr, reflecting broader vulnerabilities in an industry racing to meet aggressive growth targets. For investors, the question is no longer whether the EV boom is sustainable but whether the metrics underpinning it are trustworthy.

The Allegations: A Flawed Strategy or Systemic Risk?

Chinese state media, including the China Securities Journal, has accused Zeekr of inflating sales by insuring vehicles before they were sold to consumers. This practice, known as the "zero-mileage used car" tactic, exploits a loophole in Chinese registration rules: a vehicle is considered "sold" once it is insured, even if it has not been delivered. By arranging insurance through subsidiaries like Xiamen C&D Automobile, Zeekr allegedly recorded thousands of sales in December 2024—14 times its monthly average—while only 271 cars were actually registered for license plates.

Zeekr has denied the allegations, stating that the vehicles in question were showroom display models insured for safety purposes and remained "legally new." The company claims no formal sales were recorded until the vehicles were delivered to buyers. However, the lack of transparency in its response has left room for skepticism.

The market has reacted swiftly. On July 21, 2025, Zeekr's American Depositary Receipts (ADRs) fell 3.59% to $28.99 per share following the Reuters report. While the drop was modest, it signals investor unease. The Pomerantz Law Firm is now investigating potential securities fraud, and a class-action lawsuit could loom if the allegations gain traction.

Regulatory Crackdowns: A Wider Industry Problem

Zeekr is not alone. The China Securities Journal has also implicated Neta, another EV brand, in similar practices since 2022. The Ministry of Industry and Information Technology (MIIT) is reportedly drafting a six-month resale ban on newly registered vehicles to curb the "zero-mileage" loophole. This regulatory shift, if implemented, would directly impact companies relying on artificial sales tactics.

The broader context is critical. China's EV market is overcapacity-laden, with a price war eroding margins. In Q2 2025, while Zeekr, NIO, and Li Auto reported double-digit sales growth, these figures often masked underlying financial weaknesses. For example, NIO's 25.6% growth in Q2 2025 came alongside a $930 million net loss in Q1 2025, driven by R&D and marketing costs.

BYD, the sector's standout performer, has navigated these challenges through vertical integration and cost control. Its market share in China surpassed 20% in 2023, while companies like Xpeng and Leap struggled to meet targets. BYD's success underscores the importance of sustainable business models in an industry where aggressive growth metrics can obscure financial fragility.

Historical Precedents and Investor Risks

The EV sector's history is rife with examples of inflated sales leading to market corrections. In 2023, the combined market capitalization of pure-play EV makers fell nearly 20% as investors grew wary of overhyped growth. Tesla, which had driven much of the sector's earlier euphoria, saw its stock decline 15% in 2023 compared to 2022.

For Zeekr, the risks are twofold. First, regulatory action could force a restructuring of its sales practices, reducing near-term revenue. Second, a loss of consumer trust—exacerbated by reports of buyers denied refunds for pre-insured cars—could erode brand loyalty. The People's Daily, China's official newspaper, has already condemned the "zero-mileage" tactic as harmful to the industry's reputation.

Moreover, international skepticism about Chinese EVs adds another layer of complexity. The U.S. and EU have imposed tariffs on Chinese EVs, forcing companies like BYD and Zeekr to invest in local production. If Zeekr's sales practices are exposed as fraudulent, its global expansion could stall, further straining its finances.

Investment Implications: Caution in a Volatile Sector

For investors, the key takeaway is to prioritize transparency over growth. The EV sector's rapid expansion has been fueled by speculative bets, but the recent regulatory and legal scrutiny suggests that the days of unchecked optimism are ending.

1. Due Diligence on Financial Reporting: Investors should scrutinize EV companies' sales methodologies. For Zeekr, the lack of clarity around its "showroom display" vehicles raises red flags.
2. Diversification: Given the sector's volatility, spreading investments across companies with robust financials (e.g., BYD) and traditional automakers pivoting to EVs (e.g., SAIC Motor) can mitigate risk.
3. Regulatory Watch: Monitor developments in China's EV policy. A six-month resale ban or stricter disclosure requirements could reshape the competitive landscape.

In the long term, the sector's survival will depend on companies that balance growth with accountability. Zeekr's response to the allegations—whether through legal defense or operational transparency—will be a litmus test for its resilience. If the company can navigate this crisis without sacrificing its core values, it may emerge stronger. But for now, the risks are clear.

Conclusion: A Sector at a Crossroads

The Chinese EV sector stands at a crossroads. The allure of rapid growth has been tempered by the reality of regulatory scrutiny and financial instability. For Zeekr, the path forward is uncertain. Investors must weigh the company's denials against the broader industry trends and regulatory pressures. While the EV revolution is here to stay, the companies that thrive will be those that build trust as much as they build cars.

In this environment, caution is not just prudent—it is essential. The next chapter of China's EV story will be written by those who adapt to the new rules of the game.