China's Electric Vehicle Market Grapples with Overcapacity and Intense Competition Amidst Government Intervention
Key Insights
China's electric vehicle market, despite global dominance, faces severe internal challenges including rampant overcapacity and fierce price competition among approximately 50 automakers.
The intense competition has led to significant financial strain, with manufacturers struggling to pay suppliers and resorting to state-backed borrowing to fund further factory expansion.
Beijing has initiated a campaign against 'involution,' or excessive competition, with top leadership calling for industry self-discipline to mitigate the destructive market dynamics.
Even industry leader BYD has experienced a notable profit decline and sales stagnation, while smaller, more agile rivals like Geely, Leapmotor, Nio, and Xpeng are gaining market share.
China's electric vehicle (EV) sector, a global powerhouse responsible for producing more EVs than any other nation and leading in innovation, is currently navigating a period of significant internal turmoil. While battery-powered and plug-in hybrid vehicles now constitute over half of all new car sales in China, the industry's rapid expansion has fostered an environment of ruthless competition and extensive overcapacity.
Approximately 50 domestic automakers are locked in a fierce battle for market share, frequently resorting to aggressive price reductions. This intense competition has eroded profit margins, leading to substantial losses for many manufacturers and creating payment difficulties for their component suppliers. Despite these financial pressures, state-run banks continue to provide credit, enabling companies to construct additional factories, thereby exacerbating the existing overcapacity issue.
Beijing has taken notice of these destabilizing market dynamics. The highest echelons of the Chinese government have launched a campaign against "involution," defined as excessive competition. A Politburo meeting on the economy, led by President Xi Jinping on July 30, underscored the necessity of reinforcing industry self-discipline to prevent what was termed "vicious 'involution' competition." Initial governmental efforts to address these issues have yielded mixed results; for instance, a directive in early June for 17 automakers to pay suppliers within 60 days saw only three, all state-owned or partly state-owned, implement the required systems by an August 11 report.
The market pressures are impacting even the largest players. BYD Co., the world's leading EV manufacturer, reported a nearly one-third drop in profits during the spring compared to the previous year, directly attributing this decline to the prevailing price competition. Furthermore, BYD's total sales in August rose by a mere 0.1% year-on-year, indicating a struggle to maintain its competitive edge. In contrast, rivals such as Geely Automobile Holdings recorded a 38% sales increase in the same month, while Zhejiang Leapmotor Technology Co. and Nio Inc. achieved record deliveries. Xpeng Inc. has also seen its year-to-date shipments more than triple compared to the previous year, signaling a shift in the competitive landscape as smaller, more agile companies gain ground.