Chinese automakers produce twice as many vehicles as local consumers can buy. Why is the government still subsidizing the industry?
- China’s auto industry has the capacity to build 40 million vehicles per year, about twice as many as are sold in the country each year.
- That has led other countries to consider imposing additional taxes to protect their own automakers as Chinese companies rely on exports.
- Meanwhile, the Chinese government continues to fund the industry to protect jobs and support economic growth.
Across China, car manufacturers currently have the production capacity to build around 40 million vehicles per year, but consumers in the country only buy around 22 million cars annually. Despite this disparity, the Chinese government continues to support the industry’s growth.
China’s overcapacity problem is thwarting the plans of established automakers and those pushing new technologies. Production lines for internal combustion engine vehicles churn out products that are increasingly falling out of favor with consumers.
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Meanwhile, new energy vehicles such as electric and plug-in hybrid vehicles, which could potentially absorb this excess capacity, face their own headwinds due to broader economic concerns.
Last year, 123 brands in China offered at least one electric model, the Wall Street Journal reports. And even companies like Zhido, which went under in 2019, are being brought back from the dead by investors. That has plunged electric vehicle makers into a bitter price war as they try to woo buyers who are spoiled for choice.
Unsurprisingly, automakers are eager to enter new markets, leading to a fivefold increase in Chinese auto exports between 2020 and 2023. Many of those gains came in Russia, where Chinese automakers intervened following the Eurasian country’s conflict with Ukraine, which led to trade embargoes by the U.S. and its allies.
Chinese automakers are also interested in selling their electric vehicles abroad, raising concerns among both Western rivals and governments. In the United States, the White House is considering expanding tariffs to protect domestic production, while the European Union is studying China’s electric vehicle subsidies and may consider similar measures.
This inevitably leads to the question of why China is subsidizing an industry that is already facing overcapacity. This is tied to the national government’s desire to strengthen its automakers on the global stage, as well as its efforts to support economic growth and preserve jobs in the face of broader economic challenges.
Government support means even unprofitable car manufacturers can continue to produce more vehicles. In 2023, only four of the country’s 123 electric car makers sold more than 400,000 vehicles – a figure widely considered to be the number that must be reached for an automaker to break even in China. These companies are BYD, Tesla, Aion and Wuling.
This has led some Chinese officials to call for consolidation of the automotive industry. However, the expansionist mentality espoused by the national government remains dominant for now.
