Deep Dive: China’s electric vehicle industry looks overseas for profits thanks to overcapacity in local market

China is the world’s largest automotive and electric vehicle (EV) market and a major producer of EVs. Nearly four out of every 10 new cars in the nation are powered by batteries.

However, the domestic industry is crowded with more than 100 companies. Even after the collapse of several underachieving firms like WM Motor and Human Horizons, it faces the problem of overcapacity, as not enough people are buying what the companies are making.

The National Bureau of Statistics revealed that the country’s automobile and new-energy equipment manufacturing sectors struggled to utilise and sell all their products during the first quarter of the year.

In 2023, only 20 of China’s 77 automakers reported utilisation levels above the normal range of 60 per cent, according to a report by Shanghai-based consultancy Gasgoo. Less than half of last year’s car-production capacity of 55 million was used.

“There are warning signs, if we assume overcapacity means China is producing more than its domestic economy can consume,” said Alicia Garcia-Herrero, French investment bank Natixis’ chief economist for the Asia-Pacific region.

Thus, more than a dozen Chinese EV companies are looking abroad to increase sales, chase higher profits and make up for losses at home. But a price war is spreading.

“Increasing sales outside China is a good way of chasing profits because prices in markets like Southeast Asia are much higher than on the mainland,” said Qian Kang, an entrepreneur who owns car components businesses in East China’s Zhejiang province.

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“But when Chinese carmakers land in those markets in droves, price competition becomes inevitable, which eventually hurts their own interests.”

In Southeast Asia, where battery-powered cars are becoming more popular, Chinese EV companies are offering discounts to compete with Japanese rivals whose petrol vehicles currently dominate the market.

According to Jacky Chen, general manager of Jetour Auto International, Chinese EV builders are still reporting strong profits in the Asean market.

In 2023, EV sales represented just 3 per cent of total car sales in the region, but accounting firm Deloitte predicted the rate could soar to 10 per cent. Industry officials say this could allow Chinese EV companies to challenge market leaders like Toyota.

But David Zhang, director of the WDEF Digital Automotive International Cooperation Research Centre in Hangzhou, pointed out: “Chinese EV makers need to reach a consensus that constant price reductions will be detrimental to all of them because lower prices will lead to heavy losses.”

Staff writers

1. Which of the following statements about China’s EV industry are correct?

(1) China’s domestic EV industry doesn’t have enough companies taking part.
(2) China produces nearly four out of every 10 new cars around the world.
(3) Dozens of Chinese EV assemblers are targeting overseas markets to bolster sales and chase higher profits.
(4) To boost sales, many Chinese EV builders are offering discounts to take on rivals.

A. (1), (2) only
B. (3), (4) only
C. (1), (3) only
D. (2), (4) only

2. Why are Chinese EV companies focusing on selling their cars overseas?

3. To what extent do you agree with David Zhang’s statement that Chinese EV makers should reach an agreement on the price? Explain using News and your own knowledge.

1. Which country and industry are represented in the illustration, and how can you tell?

2. What problem might the artist be trying to illustrate?

• US tariffs targeting China’s new-energy sector could affect export efforts aimed at alleviating a market oversupply

• Some analysts say West’s motivation is profit, while others point to efforts to help local car industries

Sparks are flying as overcapacity in China’s electric vehicle (EV) industry has turned up the heat between Beijing and the West.

Amid Beijing’s policy push to rev up the green transition over the past several years, the EV and other green industries saw a steady capacity build-up.

China’s leadership is prioritising the growth of the new three sectors: electric vehicles (EVs), lithium-ion batteries, and solar panels. These sectors represent a shift away from China’s traditional “old three” pillars of exports - clothing, home appliances, and furniture.

In 2009, China began pushing its carmakers to develop cutting-edge EV technology with an eye on leapfrogging the global makers of petrol-powered vehicles.

As the fruits of China’s exhaustive EV undertakings are realised, the world’s second-largest economy is facing strong pushback from the United States and the European Union. Both regions have repeatedly raised concerns that their domestic companies are being squeezed out by low-priced Chinese products that have flooded in since manufacturers see overseas markets as a way to help them sell off excess capacity.

The EU launched anti-subsidy probes on Chinese electric vehicles last September to determine whether to impose punitive fees. Last month, the US rolled out new tariffs on Chinese electric vehicles and a range of other goods related to the new energy economy, including quadrupling EV duties to more than 100 per cent.

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Meanwhile, Beijing has urged Washington not to politicise the issue or seek to contain China, while adding that policymakers on both sides of the Atlantic should embrace the fundamental principles of a market economy.

Lance Liangping Gore, a senior researcher with the National University of Singapore’s East Asian Institute, said the term “overcapacity” could be misleading.

“EVs are just starting to replace gasoline vehicles, and the capacity is far from enough. It’s quite conceivable that global emission reductions will come faster – and cheaper for consumers – if China keeps producing at an optimal scale,” Gore said.

“The West’s concerns boil down to profits [instead of] fighting climate change. In neither case is overcapacity the real issue,” he added.

But Jean-Pierre Cabestan, a senior researcher with France’s National Centre for Scientific Research, stressed that the West’s motivations were more complex than just protecting a few uncompetitive producers.

“The stakes are high: saving the European car industry and the jobs and supply chains along with it,” said Cabestan, who is also a professor of international studies at Hong Kong’s Baptist University.

“There is consensus in the EU that transcends election rhetoric and populism. European buyers may even prefer to pay more [for local EVs].”

Staff writers

1. What are China’s “new three” sectors, and what are they aiming for?

2. According to Issue, which of the following statements are false?

(1) Since 2009, China has been developing EV technology, aiming to leapfrog the global makers of petrol-powered vehicles.
(2) Many low-priced Chinese products have flooded the overseas market to address overcapacity.
(3) China has not faced much pushback or concerns about their low-priced products undercutting local manufacturers.
(4) The EU and the US have rolled out new tariffs on Chinese electric vehicles.

A. (1), (2) only
B. (3), (4) only
C. (1), (3), (4) only
D. (2), (3), (4) only

3. To what extent do you agree that overseas countries should impose tariffs on China’s EV exports? Explain using News, Issue, and your own knowledge.

1. Identify and explain TWO key trends from the chart.

2. According to News, Issue, and your own knowledge, list TWO potential consequences that could arise from the trend.

electric vehicle: a car powered by an electric motor that draws electricity from a battery and can be charged from an external source. EVs are different from traditional petrol cars, which generate power by burning a mix of fuel and gases, and could help reduce greenhouse gas emissions.

new-energy equipment manufacturing: the manufacture of new energy vehicles, lithium batteries, and photovoltaic products of green and low-carbon energy to address global climate change.

price war: a form of market competition in which companies within an industry engage in aggressive pricing strategies, offering prices below those of competitors in a strategic attempt to undercut one another and capture greater market share.

new three sectors: China’s hi-tech green industries, including photovoltaics, lithium-ion batteries, and new energy vehicles, which are experiencing substantial growth. According to official data, exports of the “new three” amounted to 1.06 trillion yuan (HK$1.24 trillion) in 2023, registering a 29.9 per cent year-on-year increase.

anti-subsidy probes: an investigation launched by the European Commission that aims to discover if Chinese exports of EVs to the EU market are benefiting from excessive subsidies and harming the EU’s industry. The Commission will have up to 13 months to assess whether to impose tariffs above the standard 10 per cent EU rate for cars.

tariffs: taxes imposed by one country on the goods and services imported from another to influence it, raise revenue, or protect competitive advantages.

News

1. B

2. Not enough people in China want to buy their cars, so they hope to make more money outside of the country.

3. I largely agree with Zhang’s statement that Chinese EV makers should reach a consensus on pricing to avoid uncontrollable price reductions that could harm their profitability. The destructive price war would erode the industry’s overall profitability and lead to widespread financial losses across the Chinese EV sector.

Some may argue that the price war could benefit consumers by offering cheaper and broader choices of EV products. However, this short-term consumer gain is not sustainable. An industry-wide price war would ultimately hamper the industry’s development domestically and globally in the long run. Therefore, reaching a consensus on pricing strategy and finding ways to rationalise the market’s overcapacity are necessary.

Illustration

1. The red pipe with the five stars resembles China’s flag. Cars are coming out of the pipe, representing China’s automobile industry.

2. The cartoon showcases the overcapacity issue in China’s electric vehicle market, as the bowl fails to adequately contain the surplus of cars.

Issue

1. The “new three” sectors are electric vehicles (EVs), lithium-ion batteries, and solar panels, which aim to rev up the green transition in China.

2. B

3. I agree with Jean-Pierre Cabestan’s viewpoint. The West’s move to impose tariffs and investigate Chinese products can protect their domestic industries. If the price war continues with low-price Chinese EV exports, Western manufacturers could be overwhelmed by the influx of affordably-priced Chinese vehicles, which could lead to a massive loss of market share, plant closures, supply chain disruptions, and unemployment.

While Lance Liangping Gore’s point about China’s “overcapacity” potentially accelerating global emissions reductions and EV affordability has some merit, it’s important to maintain fair and healthy competition and offer customers quality products. Therefore, the West’s measures are a reasonable way to foster an environment where domestic and foreign automakers can compete on equal terms based on factors like quality and efficiency.

Chart

1. China’s overall EV exports have steadily increased over the past five years, from over 200,000 units in 2019 to 1.4 million in 2023. In contrast, the EU’s EV exports, while increasing during this period, only reached over 400,000 units in 2023 - a far smaller gain than China’s substantial export growth.

2. The surge in Chinese EV exports could result in a price war, leading to an influx of low-priced products in the market. This could undermine the competitiveness of domestic automakers in the EU and other regions, causing a loss of market share. Additionally, the dominance of Chinese EV exports could disrupt global automotive supply chains as manufacturers in the EU and other regions become heavily dependent on Chinese products.