In China, the overcapacity in the new energy vehicle industry has led to the emergence of chaotic phenomena such as “zero-kilometer second-hand cars” and “car cemeteries,” with almost no profits for car manufacturers, largely due to the policies of the Chinese Communist Party. Analysts believe that the Chinese auto industry is heading towards the same fate as the real estate and photovoltaic industries, with the only way out being the closure of many car companies. However, local governments are heavily supporting these companies to avoid closures, resulting in a vicious cycle in the car market.
The latest data released by the China Automobile Dealers Association on the 28th revealed that 73.6% of used car dealers operated at a loss in the first half of the year, with high levels of used car inventory.
According to the “China Automobile Distribution Industry Report for the First Half of 2025,” while the volume of used car transactions increased in the first half of the year, the average price decreased significantly, dropping from RMB 61,180 to RMB 53,673, a 12.3% decline. The sales of new energy vehicles accounted for 36.7% of China’s total automotive sales.
Moreover, the pressure from excess used car inventory is growing. In June 2025, the average inventory cycle of used cars extended to 43 days, with the proportion of enterprises with inventory cycles of over 30 days increasing to 35.6%, indicating continued operational pressures for car dealers.
AlixPartners predicts that by 2030, only 15 out of the 129 electric and hybrid car brands in China will achieve financial viability.
CEO and co-founder of Chinese electric vehicle startup Xiaopeng Motors, He Xiaopeng, predicted in 2023 that for a car company to survive by 2030, it must achieve an annual sales volume of 3 million vehicles, with ultimately only eight companies able to do so. Xiaopeng Motors sold just 190,000 vehicles in 2024.
The price war in the Chinese auto industry has entered its third year. Some analysts believe that the only way out is for many car companies to close down; however, many officials resist this “hard approach,” fearing it could lead to mass layoffs and a decline in consumption.
Yuhan Zhang, Chief Economist of the World Association of Large Enterprises China Center, stated that this situation has led to a vicious cycle between automakers and local governments, potentially trapping the market in a downward spiral.
In June of this year, the Guangzhou government issued a policy document aiming to foster up to three new energy vehicle companies, each with an annual production capacity of 500,000 vehicles. In return, Guangzhou promised up to RMB 500 million (approximately USD 70 million) in rewards annually to each company after building new production lines and producing 100,000 vehicles within three years.
Policy documents show that from 2023 to 2025, at least six other local governments have released similar policies encouraging car companies to expand their production capacity.
Chairman of one of China’s largest truck manufacturers, Sany Heavy Truck, Linhe Liang, stated that Chinese automakers, even if suffering significant losses, must continue sales and production to ensure cash flow, which is critical for survival. He likened it to riding a bicycle, where continued pedaling may leave one exhausted but keeps the bicycle upright.
Not only local governments but also the Chinese State-Owned Assets Supervision and Administration Commission have been supporting state-owned automotive companies to expand their production capacity.
When state-owned carmakers like Chang’an, Dongfeng, and FAW lagged behind private enterprises in electric vehicle competition in 2024, the state asset regulatory agencies announced their hopes for state-owned enterprises to increase market share and production volume, rather than focus on profitability. In July of this year, Chang’an announced plans to quadruple its sales of new energy vehicles by 2030.
Meanwhile, the issue of overcapacity in China’s new energy vehicle industry persists. Recently, a large number of new energy vehicles have appeared on social media platforms similar to TikTok, being sold at low prices. Some brand-new vehicles have been labeled as “used cars,” shipped abroad, or even abandoned in overgrown car cemeteries.
According to a recent Reuters investigation, Chinese car companies are striving to meet production targets influenced by government policies rather than consumer demand, making it nearly impossible for any Chinese car manufacturer to be profitable. The starting price for Chinese electric vehicles is less than $10,000, while models priced below $35,000 are rare in the United States.
The latest data from the China Automobile Dealers Association shows that in the first four months of 2025, the inventory of new energy vehicles surged from 660,000 to 850,000 vehicles, with the inventory growth rate three times faster than the market’s end-user sales growth rate. Gasgoo Consulting predicted that in 2024, China’s car companies had a production capacity of 55 million vehicles, twice the actual output.
Michael Pettis, senior researcher at the Carnegie China Center, stated, “China’s overcapacity problem is a systemic issue.”
Many insiders and analysts in the Chinese automotive industry believe that the market is severely oversaturated, likely to experience turbulent times akin to the real estate and photovoltaic industries.
Based on thousands of car sales data, hundreds of government documents, official media reports, court records, and consumer complaints, as well as interviews with around 20 industry insiders including dealers, buyers, analysts, and car company executives, a Reuters report highlights that the policies favoring employment and economic growth goals by the Chinese Communist Party have resulted in sales volume and market share considerations over profitability and sustainable competition. Local governments provide cheap land and subsidies to car companies for capacity and tax revenue, resulting in an overcapacity of new energy vehicles.
The Chinese Communist Party initiated the chaos in the Chinese auto industry by encouraging car manufacturers to produce electric vehicles starting in 2009, pushing for consumer purchases and providing billions of dollars in subsidies. Beijing drafted an automotive industry policy blueprint in 2017, aiming to produce 35 million cars annually by 2025, nearly double the annual sales record of the U.S.
At the time when China was addressing its overheated real estate sector and curbing excessive investments, the automotive industry became an alternative economic pillar for local governments relying on land sales and property taxes.
Local governments incentivize auto manufacturers and set production and revenue targets, leading manufacturers to prioritize meeting these targets over profits. Over time, manufacturers at risk of being eliminated from the market could survive due to support from local governments.
In 2021, the Longfeng county government in Anhui attracted automotive giant BYD with cheap land. Reuters confirmed through publicly released real estate sales documents that the electric vehicle manufacturer purchased 8.3 square kilometers of land in Longfeng over five years at an average price 40% lower than other buyers.
In 2022, smartphone maker Xiaomi began acquiring land in Beijing’s Yizhuang district to build an electric vehicle factory. Land sale documents revealed that by 2024, the company had acquired land space exceeding the size of 206 football fields at an average price 22% lower than other industrial land prices. The documents also indicated that Beijing required the factory to generate annual revenue of at least RMB 47 billion (approximately USD 6.6 billion) at full production capacity.
Reports from Dajiyuan noted that between 2014 and 2019, there were once over 60 new carmakers in the market, but now only a few companies such as NIO, XPeng, and Li Auto remain. These defunct new carmakers were estimated to have landed production capacity of 3.89 million vehicles with total financing of RMB 107 billion.
With most new carmakers bankrupt or closed, investments made by most local governments in the production bases of these new carmakers have become increasingly difficult to recoup.