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China’s world-beating auto industry is staring into an abyss.
Its carmakers and dealers are struggling to make money and fierce competition has left scores of firms on the brink of collapse. Meanwhile, many thousands of cars are being sold at a fraction of their price, or left abandoned altogether in automotive graveyards.
Those are the findings from an extensive investigation carried out by Reuters, which reviewed thousands of car-sales listings and hundreds of government documents, state-media reports, court filings and consumer complaints, and interviewed with some 20 industry players, including dealers, buyers, analysts and manufacturing executives.
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Industry executives say making a profit is nearly impossible for almost all automakers in China, where electric vehicles start at less than $10,000 — in stark contrast to the US, where carmakers offer just a few under $35,000.
Most Chinese dealers can’t make money, either, according to an industry survey published last month, because their lots are jammed with excess inventory.
At the root of the problem are years of subsidies and other government policies aimed at making China a global automotive power and the world’s electric-vehicle leader.
China has more domestic brands making more cars than the world’s biggest car market can absorb because the industry strives to hit production targets influenced by government policy, instead of consumer demand, Reuters found.
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The seeds of the current state of China’s automotive market were planted in Beijing, where national policymakers as far back as the 1990s wanted to put China in the driver’s seat of electric vehicle production.
In 2009, Beijing launched a programme to encourage carmakers to produce EVs and consumers to buy them, backed by billions of dollars in subsidies.
By 2017, EVs hadn’t taken off. That year, Chinese government officials drafted a car-making policy blueprint that outlined a goal of producing 35 million vehicles a year by 2025 — roughly double the US annual sales record.
The push for EVs became particularly profound as an overheated property sector began to bite local governments and unsold condo blocks began weighing on the Chinese economy. The automaking blueprint became a timely alternative economic pillar for local governments that had begun to rely on land sales and real-estate tax revenue.
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Governments that bet on the right automaker saw massive gains. In 2021, for instance, the county government of Changfeng, in Anhui province, attracted auto giant BYD with super cheap land. In return, the county, whose main industry was making traditional flatbread, got a BYD mega-factory.
Over five years, BYD bought up 8.3 square kilometres of land in Changfeng at an average price 40% below that paid by other buyers, Reuters determined from property-sales filings published by China’s government. BYD didn’t address questions about the arrangement and other matters raised in this report. A person reached by phone at Changfeng county’s propaganda office said some of the reporting was inaccurate and declined to elaborate.
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Two Communist Party officials in Changfeng tied to the BYD project, Fan Shaobin and Li Mingshan, received promotions to higher levels of government in 2024, notices published by the party’s Anhui Provincial Committee show.
Following a similar playbook. smartphone maker Xiaomi began buying land in Beijing’s Yizhuang district in 2022 for an EV factory. By 2024 it had purchased more than 206 soccer fields’ worth at an average price 22% below the rate others paid for industrial land, land-sales filings show. The city of Beijing required the plant to generate a minimum annual revenue of 47 billion yuan, about $6.6 billion, at full production, according to the filings.
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While some governments won big, these policies multiplied overcapacity across the country, resulting in a price war that has now raged on for three years.
Concerns around price cuts have been such that in June, after BYD announced brutal new price cuts, the chief of Great Wall Motors, one of China’s oldest carmakers made a series of rare public statements alleging price wars were destroying the bottom lines of car companies and their suppliers, while also creating a mountain of debt.
“The EV industry’s Evergrande is already here,” Wei Jianjun said referring to China’s once-largest property developer that went belly-up in 2022 due to its more than $300 billion worth of debt. Automakers such as Geely and GAC Aion backed up Wei.
The only escape would involve letting many automakers fail, some analysts say. But many Chinese officials have resisted that tough-love path, which industry analysts say would risk mass layoffs and falling consumer spending.
That leaves automakers and local governments locked in an increasing downward spiral, said Yuhan Zhang, principal economist at The Conference Board’s China Center, a research group.
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Grey markets and TikTok livestreams
The market conditions so created have left automakers with few options to deal with rising inventories. Some cars end up in grey markets, where cars can end up being sold at as much as a quarter of their listing prices.
In one showroom on the outskirts of Chengdu, [...] locally made Audis being sold at 50% off. Similarly, a seven-seater SUV from China’s FAW is about $22,300, was on sale for more than 60% below its sticker price.
The deals were being offered by a company called Zcar, which said it buys in bulk from automakers and dealerships.
Zhou Yan, Zcar’s marketing director, told Reuters it can sell at deep discounts because it buys some vehicles directly from automakers in batches.
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In recent months, though, Chinese authorities have started to sound alarm bells on the auto price wars, saying the competition was irrational and unsustainable. This summer, President Xi Jinping rebuked provincial officials, questioning why every province was racing to invest in a handful of technologies such as EVs and artificial intelligence.
The brewing crisis has larger implications for China’s economy, where the auto industry and related services comprise about one-tenth of gross domestic product.
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With losses mounting for so many carmakers, there is growing talk among some industry analysts of a traumatic shakeout.
Still, three industry figures and two analysts told Reuters an abrupt shock is unlikely: Consolidation could take years, and local governments would probably support flailing automakers, containing the fallout.
“The problem of excess capacity in China is a systemic problem,” Michael Pettis, a senior fellow at Carnegie China research centre, said.