In a showroom in a commercial complex in Chengdu, thousands of new cars are being sold at “fire-sale prices”: Audi at half price, and a domestic SUV with a sixty percent discount. According to a report by Reuters, behind these extreme discounts lies the serious problem of overcapacity in the Chinese automobile market.
For years, the Chinese Communist government has promoted the expansion of the car industry through subsidies and policy support, aiming to build a global powerhouse in both traditional and electric vehicles. However, the number of domestic brands and production capacity far exceeds market demand, leading to widespread difficulties for car manufacturers and dealers in turning a profit. Electric vehicles in China are even priced below $10,000, while in the U.S., the average price is usually over $35,000.
Industry surveys have shown that many dealerships are struggling under the weight of massive inventory, forcing them to slash prices. Some retailers are registering unsold new cars in order to meet sales targets and receive rebates from manufacturers. Unsold cars are flowing into the grey market, often labeled as “zero-kilometer used cars” for export or ending up in “car graveyards.”
This crisis in the automobile industry is reminiscent of the excessive investments in China’s real estate and solar industries. Local governments are eagerly exchanging cheap land and subsidies for production output and tax revenues, pushing companies to prioritize meeting quotas rather than focusing on profitability. Analyst Rupert Mitchell commented that “when Beijing designates automobiles as a strategic industry, every province wants a car factory.”
Official data shows that Chinese carmakers have an annual production capacity exceeding 50 million vehicles, which is twice the actual production in 2024. Demand for traditional cars has sharply declined, while factories producing new energy vehicles are spreading rapidly due to subsidies. Consulting firm AlixPartners predicts that by 2030, only 15 out of 129 new energy vehicle brands in China will survive.
The price war in the Chinese auto market has been ongoing for three years. BYD has lowered its sales target for the year to at least 4.6 million vehicles from 5.5 million, with quarterly profits decreasing for the first time in three years. Compared to this, many car manufacturers are far below the threshold for survival in terms of sales volume, yet they continue to expand production. Some state-owned enterprises are even being urged by the State-owned Assets Supervision and Administration Commission to “increase production and maintain market share.”
Yuhan Zhang, Chief Economist of the China Center at the U.S. Economic Consultative Council, pointed out that the automobile manufacturers and local governments in China are “mutually dependent and reinforcing each other,” potentially dragging the market into a vicious cycle.
Dealerships are also facing immense pressure. A survey by the China Automobile Dealers Association revealed that only thirty percent of dealerships are profitable. Dealerships in Henan, Sichuan, and other regions have openly called for manufacturers to implement policies that reflect market realities, stating that “if the sales channels collapse, the market will die.” Some dealerships have admitted that they would rather sell cars at a loss on the last day to secure bonuses.
In the grey market, traders like Zcar are bulk purchasing inventory, selling cars through platforms like Douyin (TikTok) at low prices through live broadcasts. A Reuters investigation found that Zcar once bought over 3,000 Chevrolet Malibus from SAIC General Motors at $14,000 each, far below the original price. Some Audi models are also being discounted by half.
Foreign brands are also feeling the impact. Data from the China Association of Automobile Manufacturers shows that in the first seven months of 2025, the market share of foreign brands dropped significantly to 31%, down from 62% in 2020. Europe is concerned about cheap Chinese cars impacting the domestic industry, while the U.S. has almost completely banned the import of Chinese cars.
Analysts believe that there will not be a large-scale sudden restructuring in the short term, as local governments may still intervene to prevent widespread unemployment. Carnegie Senior Researcher Michael Pettis pointed out that China’s overcapacity in the car industry has become a systemic issue, and only by allowing some car companies to exit the market can the crisis be truly alleviated.
As car manufacturers and local governments are caught in a vicious cycle of “lose more, produce more,” the world’s largest automobile market is being dragged into an endless price war without a clear end in sight.