Massive Overcapacity Threatens to Prolong China’s Car Price War

China’s long-running auto price war is overshadowing a deeper problem for the nation’s car industry: persistent overcapacity. Despite a slight uptick in recent years, more than half of production capacity lay idle in 2024. 

In an industry capable of making 55.5 million vehicles annually, overall capacity utilization last year was just 49.5%, data compiled by Shanghai-based Gasgoo Automotive Research Institute show. 

The headline rate was dragged down by some of the smallest manufacturers. Hainan Haima Automobile Co., a venture that started as a partnership with Japan’s Mazda Motor Corp. and later attracted investment from FAW Group, posted a meager capacity utilization rate of 1.5% last year, the data show. From a production line capable of churning out 450,000 vehicles, a mere 6,836 units rolled off its lines. 

A similar fate befell Haima Co., another Hainan-based manufacturer with historical ties to Hainan Haima, which recorded an equally dismal 1.7% utilization rate.

Even the burgeoning electric vehicle segment isn’t immune to vast capacity underutilization. Mengshi Automobile Technology Co., a premium electric off-road brand under Dongfeng Group, used just 1.9% of its planned capacity, highlighting the challenges of scaling niche high-end EV production.

The low capacity utilization suggests that the price war is set to intensify, pressuring profit margins as manufacturers compete for a slice of the hyper-competitve market. It could also hasten industry consolidation, as smaller, weaker companies go out of business or are swallowed by larger competitors. Government officials are trying to minimize the fallout, earlier this month chiding the sector for “rat race competition” and summoning heads of major auto brands to Beijing. 

Market leader BYD Co. ran at 82.1% as it quickly expanded production sites in China and abroad. It has been one of the most aggressive players in the price war, kicking off the latest wave in late May with reductions of as much as 34% on 22 of its electric and plug-in hybrid models until the end of this month.

“As long as you have 50% capacity realization, you won’t be able to end the price war in a normal market,” said Jochen Siebert, managing director at auto consultancy JSC Automotive. While such a situation in Europe would lead to plant closures, it’s not as simple in China given competing interests of national and local governments, he said. 

At the other end of the scale, stronger, established manufacturers are operating closer to full capacity. Tesla Inc.’s Shanghai factory ran at 96.1% last year, supported by both domestic markets and a significant export business.

Xiaomi Corp., whose debut SU7 sedan became an instant hit, quickly ramped up production capacity to 95.5%.

©2025 Bloomberg L.P.

This article was generated from an automated news agency feed without modifications to text.