cross-posted from: https://lemmy.sdf.org/post/42055814

China’s automotive industry must seem like an unstoppable force to outsiders. Local champions like BYD and Geely have supplanted the international brands that first made the country the world’s largest car market in 2009. They sport the most advanced battery technology. And the People’s Republic is now the largest vehicle exporter, prompting the U.S. and the European Union to impose tariffs. Despite these advantages, scores of their carmakers are heading for a crash.

The ostensible problem is a vicious price war that has lasted more than two years. Rivalry has spiralled into what policymakers call “neijuan”, which translates literally to “involution”, a buzzword for a frantic, self-destructive struggle. The average price of a new car is likely to fall to around $24,000 this year for a basket of six automakers including Great Wall Motor and BYD; that’s 21% lower than 2021, according to estimates gathered by Visible Alpha. Carmakers also try to outdo one another with features like built-in hotpot cookers and multiple screens, free insurance and cheap loans.

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Big players are starting to feel the squeeze. After growing both market share and margins for much of the price war, BYD last week reported a nearly 30% drop in quarterly net profit. The world’s largest electric-vehicle maker followed that on Monday with its second consecutive fall in monthly production, the first time that happened since 2020. The $136 billion manufacturer had tried to boost sales with big discounts while splurging more on research and building new factories abroad. It was a similar story for Great Wall Motor, whose first-half net profit fell 10%.

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Beijing insists it wants to end this extreme level of competition, with President Xi Jinping railing against disorderly price cuts. Soon after, in July, the industry ministry told carmakers to pursue “rational competition”. Authorities are tweaking rules and guidelines, too. Such measures have had little success. Worse, none of them addresses the root cause of the industry’s woes: overcapacity. Passenger vehicle sales reached 27.6 million last year, per consultancy Automobility, but production capacity hit 55.6 million units, more than 50% higher than a decade ago, according to AlixPartners.

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Weaker players are less likely to have desirable intellectual property, and their production lines are worth little when there is excess supply. Consolidation may yet involve deals, but bankruptcies and redundances look hard to avoid. Absent a sudden huge surge in demand, swathes of China’s car industry are on a collision course with financial ruin.