China’s Auto Industry Crisis: What It Means for Investors and Businesses Eyeing Global Markets
CHENGDU: On the outskirts of this sprawling city of 21 million inhabitants, a showroom inside a shopping mall is offering unprecedented discounts on new cars. Visitors can select from around 5,000 vehicles, including locally manufactured Audis at 50% off and a seven-seater SUV from China’s FAW priced at approximately $22,300—over 60% below its original price.
These steep discounts are made possible by a glut of cars in China’s market. Zcar, the company behind these deals, claims to buy vehicles in bulk directly from automakers and dealerships.
China’s automotive industry, driven by years of government subsidies and policies designed to establish the nation as a global leader in car manufacturing and electric vehicles (EVs), has produced an oversupply of domestic brands and vehicles—far exceeding actual consumer demand. This misalignment, fueled by production targets linked more to policy goals than market needs, has rendered profitability nearly impossible for most automakers, according to industry executives.
Chinese EVs begin at under $10,000, a stark contrast to the few available in the U.S. priced below $35,000. Most dealerships are struggling financially, with lots crowded with excess stock, as revealed in a recent industry survey. To cope, dealers are cutting prices aggressively. Some even register unsold cars in bulk—a tactic allowing automakers to list these as sold for factory rebates while dealers secure bonuses. Unsold vehicles often enter gray markets, resurface on social media in flash sales, are rebranded as zero-mileage “used” cars for export, or end up abandoned in car graveyards.
These practices highlight a broader crisis reminiscent of turmoil in China’s property and solar sectors. Government policies that emphasize increased production, sales, and market share to promote employment and economic growth have led to severe overcapacity. Local governments exacerbate the problem by offering cheap land and subsidies to automakers, binding them to high production and revenue commitments.
Rupert Mitchell, an Australia-based macroeconomics commentator formerly involved with a Chinese EV startup, explains, “When there is a directive from Beijing that this is a strategic industry, every provincial governor wants the car factory. They want to be in good shape with the party. Ultimately, this causes the existing auto sector to double down on investment.”
This investigation, based on thousands of car sales listings, government and court documents, media reports, and interviews with dealers, analysts, and executives, reveals how oversupply debilitates China’s rapidly growing automotive industry. Despite rapid model launches by Chinese brands surpassing foreign competitors, the same policies that spurred growth are causing widespread financial distress throughout the sector.
China’s key economic and automotive regulators declined to comment on the industry’s challenges and the role of government policy in exacerbating oversupply. The automotive sector and its related services account for roughly one-tenth of China’s GDP, underscoring the wider economic implications. China’s National Development and Reform Commission and the State Council Information Office also did not respond to inquiries.
The crisis is marked by enormous unused factory capacity—enough to produce twice the 27.5 million cars built last year, per consultancy Gasgoo Automotive Research Institute. Gasoline vehicles face especially weak demand, as government incentives favor EVs, leading to many idle plants. AlixPartners consultancy predicts only 15 of the 129 Chinese EV and hybrid brands will remain financially viable by 2030.
The ongoing price war, now in its third year, might only be resolved if numerous automakers fail. However, officials resist this approach due to concerns over mass unemployment and reduced consumer spending. Yuhan Zhang, principal economist at The Conference Board’s China Center, warns that automakers and local governments are trapped in “a vicious cycle” feeding mutual overproduction.
Foreign brands are also struggling, their market share dropping from 62% in 2020 to 31% in the first seven months of 2025, according to the China Association of Automobile Manufacturers. European governments worry about cheap Chinese imports undermining their domestic industries, and the U.S. has nearly banned Chinese cars citing national security and unfair trade concerns.
Beijing’s EV ambitions began in the 1990s, with a major subsidy program started in 2009 to boost EV production and sales. By 2017, with EV growth lagging, a detailed policy blueprint aimed to produce 35 million vehicles annually by 2025—double the U.S. record. This plan shifted local government focus from cooling overheated property markets to aggressively courting EV manufacturers.
This strategy spurred competition among provinces, offering inducements to automakers to meet production and tax-revenue targets, often prioritizing quantity over profitability. Some companies survived only due to local government backing.
For example, Anhui’s Changfeng county successfully attracted EV giant BYD with cheap land purchases at significant discounts, catalyzing local economic growth well above the national average. In Beijing, Xiaomi acquired large plots for an EV factory at below-market prices, meeting stringent revenue targets set by the city.
In 2023, Guangzhou announced incentives of up to $70 million annually per automaker for new energy vehicle production, encouraging high output goals. Similar policies have been issued by several local governments through 2025.
Industry experts compare the excess capacity and pressure to hit sales targets in China to past issues encountered by U.S. automakers in the early 2000s, but note China’s situation is more intense. Liang Linhe, chairman of truck maker Sany Heavy Truck, likens it to “riding a bicycle – as long as you keep pedaling, the bike stays upright,” highlighting the unsustainable race for volume despite mounting losses.
Several brands, including EV upstarts Neta and Ji Yue Auto, have halted operations or restructured amid fierce competition. Yet consolidation is expected to be slow, as local governments continue to prop up faltering companies to avoid economic disruption.
Michael Pettis of Carnegie China describes China’s excess capacity as a systemic issue. Xpeng CEO He Xiaopeng predicts survival will require annual sales of 3 million cars by 2030, with only eight firms remaining viable.
Amidst this, state-owned automakers like Changan have been instructed to prioritize market share growth over profit. Changan recently announced plans to quadruple new-energy vehicle sales by 2030.
Dealers face severe profitability challenges, with just 30% operating profitably, according to an August China Automobile Dealers Association survey. Many dealers are forced to sell cars at losses or offload them to traders who resell these vehicles as low-mileage used cars, distorting market data.
At Chengdu’s mall showroom, Zcar livestream host Wang Lihong promotes these discounted cars to over 1.25 million followers, revealing that dealer inventory surges during quota periods fuel flash sales on platforms like Douyin, China’s TikTok.
Zcar marketing director Zhou Yan states the company can offer deep discounts by purchasing vehicles in bulk directly from automakers. Some models like the Chevrolet Malibu are sold for nearly half their sticker price, though GM denies any formal affiliation with Zcar.
Lastly, many new cars remain unsold and end up in “zombie” car graveyards, posing environmental and land use issues. Courts oversee auctions of these vehicles, some of which have remained unused for years, eventually appearing online for sale at steep discounts.
This oversupplied market underscores the precarious balance between government-driven industry ambitions and the realities of consumer demand, profitability, and sustainability in China’s automotive future.
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China’s car industry oversupply, driven by government policies prioritizing production targets over consumer demand, signals a looming industry shakeout and prolonged price wars. For businesses in Oman, this presents both risks and opportunities: risks from potential influxes of cheap, heavily discounted Chinese EVs disrupting local markets, but also opportunities in tapping affordable imports or tech partnerships as China consolidates its automotive giants. Smart investors should monitor emerging dominant Chinese brands and anticipate market recalibrations, positioning themselves to capitalize on competitive pricing shifts and expanding EV adoption in the region.
