Recently, at the 28th Chengdu International Auto Show, domestically-produced Audis were being sold at a discount of up to 50%, with a seven-seater SUV from FAW priced at only $22,300, around 60% lower than the listed price. These deeply discounted prices have exposed the harsh reality of the Chinese automotive industry, which is mired in a severe crisis of overcapacity. The question now becomes, where does the Chinese auto industry go from here?
According to a recent report by Xinhua News Agency, the 28th China International Auto Show in Chengdu showcased nearly 5,000 vehicles for visitors to choose from. Domestically-produced Audi cars were offered at a discount of up to 50%. The seven-seater SUV from FAW was priced at approximately $22,300, more than 60% below the listed price.
These vehicles were provided by a company called Zcar, which stated that they purchase cars in bulk from manufacturers and dealerships. The reason for the low prices is attributed to the excess supply of cars in China far outweighing the demand.
BYD, the world’s largest electric vehicle manufacturer, announced last Friday that due to price competition, its spring profits declined by nearly one-third compared to the same period last year. Industry surveys show that most dealerships are struggling with overstock and severe losses, making it difficult for manufacturers to pay suppliers while continuing to borrow money from state-owned banks to expand their factories.
Consulting firm AlixPartners predicts that out of the 129 existing electric car brands in China, only 15 brands will be financially viable by 2030.
Wei Jianjun, Chairman of Great Wall Motors, bluntly stated, “The ‘Evergrande’ of the auto industry has emerged.” Zhang Yuheng, Chief Economist of a major business association, warned that overcapacity and price wars could reinforce each other, leading to a vicious cycle.
Financial data from the first half of 2024 showed that the total net profit of the 30 listed car companies amounted to only 37.7 billion RMB. In contrast, Japanese automotive giant Toyota reported a net profit of 4.94 trillion yen (approximately 229.6 billion RMB) for the fiscal year ending in March 2024.
The crisis driven by government policies of overcapacity, vicious price wars, and supply chain pressures is pushing the automotive industry, which makes up 10% of China’s GDP, to the brink.
Reuters reported on the 17th that a survey found that China’s automotive production far exceeds the capacity of the world’s largest market. Data from the consultancy firm Gaishi Automotive Research Institute showed that in 2024, automobile production capacity reached 55 million vehicles, doubling from 27.5 million vehicles in 2023. Electric vehicles in China are priced as low as $10,000, well below the $35,000 threshold in the U.S. market, leading to widespread unprofitability for manufacturers.
Data from the China Association of Automobile Manufacturers (CAAM) showed that in the first seven months of this year, the market share of foreign brands in China plummeted from 62% in 2020 to 31%. Exports accounted for 19% of total production at 5.86 million vehicles, but faced challenges from low-price competition triggering trade barriers from Europe and America.
Reuters pointed out that the core driver of this crisis is the policies of the Chinese government. These policies aim to boost employment and economic growth, prioritizing increasing sales and market share over profitability and sustainable competition.
Since 2009, the Chinese government has invested billions of dollars in subsidies to promote the development of electric vehicles and set a target of 35 million units by 2025 in the 2017 “Medium to Long-Term Development Plan for the Automotive Industry,” double the historical record in the United States.
Local governments have been offering cheap land and subsidies to achieve tax revenue and employment targets. For instance, in 2021, Anhui’s Changfeng County attracted BYD to build a factory by offering land at less than 40% of market prices, selling 8.3 square kilometers of land within five years in exchange for tax revenue and job growth, leading to the county’s economic growth rate surpassing the national average by nine percentage points every year.
However, nationwide, doubling of production capacity has intensified the crisis. The transition from gasoline cars to electric vehicles has caused a collapse in demand, further exacerbating the overcapacity issue.
The price wars have put immense pressure on the supply chain and dealerships.
In June of this year, the government asked 17 car manufacturers to pay suppliers within 60 days, but by August, only three state-owned car companies complied.
An August survey by the China Automobile Dealers Association (CADA) showed that only 30% of dealerships were profitable, selling prices generally below costs by 20%. In order to meet the sales targets of car manufacturers, dealers often resort to offering incentives such as 80,000 RMB rebates, selling off inventory at low prices, and even willing to sell at a loss.
Lang Xuehong, Deputy Secretary-General of the China Automobile Dealers Association, acknowledged that dealership selling prices were up to 20% lower than costs. In an interview with Reuters on June 24, she stated that this situation was “unprecedented.”
According to a Reuters report in July, electric vehicle brands Neta and Zeekr were exposed for falsifying sales figures by over 60,000 units by pre-insuring unsold vehicles in their sales data. Most of these excess vehicles that were included in sales data have turned into zero-kilometer second-hand cars. Some of these cars are being sold domestically through the gray market.
Zcar’s Marketing Director, Zhou Yan, stated at the car show that the company purchases excess vehicles directly from manufacturers in bulk and resells them at low prices. In June, Zhou told Reuters that Zcar had acquired over 3,000 MG vehicles from SAIC-GM, priced at less than $14,000 each, which was below the listed price of $24,000.
Alibaba’s auction platform shows that over 5,100 BYD new cars were auctioned this year. In April 2024, Alibaba auctioned off 94 Dongfeng Honda cars for 1.05 million RMB each. The auction listing showed the cars parked indoors, covered in dirt.
Chinese courts have been auctioning off new cars from defaulted dealers and unsold vehicles. A Shenzhen court handled nearly 2,000 idled Tang cars from 2018, selling them at only a quarter of the original price. Appraisers designated by the court found that these cars had barely been driven and their interiors were brand new. They were abandoned in places known as “car graveyards,” including areas where villagers hang clothes near grocery stores.
The Chairman of one of China’s largest truck manufacturers, Sany Heavy Truck, Liang Linhe, told Reuters that Chinese automakers continue to sell and produce even at severe losses because it ensures cash flow, which is crucial for survival.
He Xiaopeng, founder of XPeng Motors, predicted in 2023 that by 2030, only eight car companies in China might survive, each needing to sell 3 million units annually.
On July 30, the Chinese Communist Party’s Economic Meeting emphasized the “strengthening of industry self-discipline to prevent internal vicious competition,” attempting to curb excessive investment, but with limited effectiveness. Investment in the automotive industry during the first seven months of this year continued to grow by 21.7%, marking the fourth consecutive year of strong expansion.
Electric vehicles are much like smartphones or laptops – the more produced, the lower the production costs. In order to increase market share, car manufacturers must continue to build larger factories, even if it means lowering the prices of electric vehicles.
Six provinces and municipalities, including Guangzhou, continue to introduce incentive policies, offering up to 500 million RMB in subsidies to car manufacturers with an annual production of 500,000 vehicles. Last year, state-owned enterprise regulators required FAW, Dongfeng, Changan, and GAC, among other state-owned car manufacturers, to increase production capacity rather than focusing on profitability, with Changan Motors pledging to double the sales of new energy vehicles by 2030.
Amidst multiple crises, Chinese car companies are banking on innovation to win market share, which requires more investment capital. The BYD Dolphin 8 features a rooftop drone, while the Geely KX11 offers hammock-style seats. These flashy features have indeed led to rapid sales growth for BYD and Geely.
Michael Pettis, a senior researcher at the Carnegie China Center, remarked, “China’s overcapacity issue is a systemic problem,” echoing the turbulence following industrial overcapacity in the real estate and solar industries.
Financial Dog Business Review calls for policy adjustments by the government, insisting that car companies must be market-oriented, balancing innovation and profitability. Otherwise, this internal storm of vicious competition threatens to destroy the industry’s foundation and hinder economic recovery. Analysts predict that industry consolidation will take several years, with local governments likely to continue supporting weaker car companies to avoid large-scale unemployment.
However, the conflict between market-oriented car companies and government support for weaker companies to protect employment is a difficult one to reconcile. The direction of Chinese car companies remains uncertain.