China’s EV Overcapacity Spurs Global Fears Of More Price Cuts

Pic: The New York Times

Electric vehicle production capacity in China continues to expand at breakneck speed despite being vastly larger than domestic demand, fanning fears that manufacturers will export vehicles abroad at cut-throat discounts.

The break-even point for factory utilization in the automotive industry is usually around 80%, but the level for new energy vehicles, which includes EVs, is only around 50% in China. Several emerging EV makers have already gone bankrupt due to overcapacity in the industry.

Auto China, one of the world’s largest automobile exhibitions, opened in Beijing Thursday. Smartphone maker Xiaomi’s booth was packed, in contrast to Nissan Motor’s, which was located right next door. Visitors focused on Xiaomi’s price competitiveness.

Xiaomi entered the market in March at a price below Tesla vehicles. When chairperson and CEO Lei Jun revealed that 75,723 vehicles had been pre-ordered, there were gasps from the audience.

Chinese EV makers are able to achieve low costs because battery procurement networks are concentrated in China. According to South Korea’s SNE Research, Chinese companies accounted for six of the top 10 battery makers last year in terms of installed car batteries. About 80% of cathode materials, the core component of batteries, are produced in China.

Batteries account for 30% to 40% of EV manufacturing costs. The average price of batteries in China is about 80% of that in Europe and the U.S., according to the International Energy Agency. Steel and other components can also be procured at low cost, and the government has been generous in providing large subsidies and other support for research and development as well as plant construction.

Low barriers to entry have led to a flurry of companies jumping into the Chinese EV market. According to data from China’s Ministry of Industry and Information Technology, more than 50 companies were manufacturing new energy passenger cars in the nation last year.

Companies are still putting the pedal to the metal to increase production capacity, aiming to expand their share of the world’s largest EV market. Seres Group, a mid-sized company that works with Chinese telecommunications equipment giant Huawei Technologies, recently opened a factory in Chongqing.

Production capacity is relentlessly increasing at a faster pace than demand. According to Chinese media, China’s production capacity for new energy vehicles in 2025 is expected to reach over 36 million vehicles when the plans of automobile companies and local governments are combined. Sales that year are expected to be around 17 million vehicles, creating a nearly 20-million-unit surplus.

Chinese media report that factory utilisation last year is expected to be about 50% due to oversupply, far below the 80% break-even point. This creates the risk of a business shakeout as profits are squeezed.

The auto industry’s profit margin in January-February was 4.3%, government statistics show, well below the 8.7% in 2015. Some new energy vehicle manufacturers have already gone bust, and some predict that more than 10 companies will go bankrupt or be near bankruptcy this year.

Some manufacturers see more exports to Europe and Southeast Asia as a way out of the crisis. According to an auto industry association, new energy vehicles exported by China in 2023 increased 78% to 1.2 million, and some believe the figure will reach 3.5 million next year.

This will be a blow to Japanese and European carmakers. BYD and other Chinese EV makers are on the offensive in Thailand and other Southeast Asian markets, where Japanese automakers hold an 80% share of the market.

There is a growing sense of wariness toward Chinese EV makers around the world. The European Union is investigating whether Chinese EVs are being sold at low prices backed by subsidies, unfairly impeding competition. The U.S. agreed to establish a framework for discussing the issue of overproduction when Treasury Secretary Janet Yellen visited China this month. – NikkeiAsia

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