China Is Full Of New Car Graveyards

Brand new Audis selling at half price, a seven-seater SUV on sale at more than 60% below its sticker price, and thousands of electric vehicles set to be given away at throwaway rates after they sat unused, collecting dust, for several years.

If that’s how things look in the world’s biggest car market… you know there’s a problem. And that problem is industrial overcapacity.

​But you probably guessed that already, considering countries across the world have been wringing their hands — for at least two decades — about China’s propensity for oversupplying everything from steel to solar panels, and dumping all that excess production all over the world. This time around, though, that overcapacity is giving sleepless nights to the country’s formidable auto industry, which is swimming in an unprecedented glut of vehicles.

​For context, China now has the capacity to produce at least 55 million cars every year. That’s just about 20 million short of the total number of cars sold across the world in 2024. On paper, that overcapacity appears to have little impact on the economy. Official figures show that as of last year, Chinese automakers manufactured 31.28 million vehicles, while selling 31.44 million units. Numbers for electric vehicles (battery and hybrid) were much the same – of the 12.89 million vehicles produced, 12.87 million units were sold.

​But behind the scenes, automakers have so much excess production on their hands that they inflate sales figures, dispose of inventories at ridiculous prices, and often operate at a loss. In a damning report published this week, Reuters described how these unsold vehicles often land up in the grey market or are left abandoned in ‘auto graveyards’ only to be sold later through government-led auctions — sometimes at a quarter of their sticker prices. So far this year, 5,100 cars made by China’s biggest carmaker, BYD, have landed up for auction. That number is 8000% higher than last year.

​The situation is so dire that some grey-market traders have now turned to social media influencers to livestream their inventories and score sales. One such influencer reportedly told his 1.25 million followers on Douyin, China’s version of TikTok, that “there’s no car that can’t be sold, only a price that isn’t right.”

​Industry insiders told Reuters that this race to the lowest possible price has made profit-making nearly impossible for almost all automakers. Early this month, the South China Morning Post reported that for most EV start-ups in the country, breaking even remains a faraway dream that will only get harder to reach. Popular upstart Nio, for instance, will have to deliver 50,000 EVs every month to customers to meet its target of breaking even by the fourth quarter this year. That number is twice the total vehicles Nio sold in the second quarter.

The case is the same for car dealers who are regularly left saddled with the bulk of these unsold cars. Some larger dealerships even tend to purchase more cars than they can sell just so they can meet automakers’ sales targets and get factory rebates. One industry insider told Reuters that dealers were making unprecedented decisions like selling up cars “at up to 20% below their cost.” China’s own figures show only 30% of dealers in the country are profitable.

A vicious cycle

At this point, if you’re wondering why car companies won’t just scale down production, the answer lies in China’s policymaking. Starting in 2009, China made it a priority to jumpstart EV production, and then doubled down on that aim in 2017 as its property sector — once a pillar of its economy — began to unravel. It did so once again in 2023, by including EVs in its basket of technologies, which it called its ‘new productive forces’.

Local governments, who wanted to stay in line with Beijing’s thinking, began doling out incentives to EV-makers, including subsidies and land for factories at heavily discounted prices. Their ask, in return, was high levels of production and targeted tax-revenues. In effect, these moves created an industry that chased production targets determined by government policy and not actual consumer demand.

Meanwhile, these local governments were also undeterred by the growing glut, as they were more concerned about larger economic growth and unemployment. BYD alone had about 900,000 people on its payroll as of last year. BYD’s mega-factory, which became the bedrock of its mammoth production capacity, was built on heavily-discounted land it bought in 2021 in Changfeng, a county whose main industry until that time was making traditional flatbread. In the five years since, BYD’s revenue has jumped nearly 260% and has fuelled Changfeng’s economy to grow much faster than the larger Chinese economy.

Success stories like that of Changfeng have meant that China’s local governments continue to chase EV companies for investments. Between 2022 and 2024, a period where issues around EV oversupply had already become apparent, Beijing’s Yizhuang district reportedly gave discounts as high as 22% to smartphone maker Xiaomi for its foray into EVs. By 2024, Xiaomi had bought up more than 206 soccer fields’ worth of land, Reuters reports. Beijing required Xiaomi to generate a minimum annual revenue of 47 billion yuan, about $6.6 billion, at full production. As of 2024, Xiaomi's smart EV and other new initiatives generated about $4.5 billion in revenue.

Still, even as automakers stare into a profitless abyss, in June, Guangzhou province announced subsidies of up to $70 million each for three automakers. It's ask? Each of them would eventually need to produce 500,000 vehicles a year.

Aside from worsening oversupply, policies like these also mean that local governments go on funding failing automakers because they have a vested interest in their survival. Manufacturers also keep selling and producing new cars, even at deep losses, to maintain cash flow and liquidity in the business.

These policies also directly explain the ongoing price war in China that has yet to cool down despite dire warnings from top Beijing officials. Elon Musk’s Tesla began the price war in 2022 to tackle growing inventories of unsold cars. Ironically, that race for discounts went on to price out Tesla from much of the Chinese market, where high-tech EVs are currently selling for less than $10,000.

The Chinese auto industry is at a point now where automakers and dealer groups are making rare public appeals for better policies and an end to price wars. Asia Financial reported in June how big brands like Great Wall Motors and Geely have taken direct shots at BYD over its heavy-handed discounts. Meanwhile, dealers have issued dire warnings saying “the market will die” if automakers keep saddling them with all their extra production.

For Chinese officials, though, it appears the message is yet to truly ring in.

Last year, as state-owned automakers such as Changan, Dongfeng, and FAW fell behind in sales, the national regulator of government-owned firms announced that it wanted the state companies to grow market share and production. In July, Changan said it wanted to quadruple sales of new-energy vehicles by 2030.

From involution to innovation

It’s worth noting that there’s nothing new about the policies creating the existential crisis for China’s EV industry. State-subsidised production and resulting oversupply have already tanked China’s property sector and sparked off brutal consolidation in the solar industry. The same glut is also currently hurting China’s battery industry and driving global supply to more than 3 times the demand. It’s a pattern so common it has earned its own moniker in China — ‘nei juan’ or ‘involution’ — meaning, hyper-competition that eventually becomes self-destructive.

But it is also important to consider that before they drove oversupply, these same policies drove explosive growth and innovation in China’s auto industry. China’s EV progress, in particular, has shocked automakers across the world. And China’s auto technology, including batteries, electric powertrains, infotainment software, and advanced driving-assisted systems, is now coveted by most global carmakers.

And it is apparent that Chinese policymakers are finally starting to see that. Over the last two months, Beijing has begun a comprehensive ‘fan nei juan’ or anti-involution campaign that aims to keep price wars in check and deter unnecessary capacity expansion.

It is also now looking to shift investment into innovation. In July, S&P Global reported that China’s local governments were now planning to spend a whopping $2 trillion to upgrade industries. The investment will go into AI, chipmaking, biotech, EVs, and new energy, it said. Within the auto industry, the capital will likely go into solid-state batteries, vehicle intelligence, and autonomous driving technologies, according to experts at Wood Mackenzie. One example of this shift is already playing out, with EV companies such as GAC Group and Nio now pivoting to building humanoid robots to automate their production lines.

But alongside these measures, China’s auto industry is still in for a reckoning. Stella Li, the executive vice-president of BYD, told the Financial Times this week that Beijing’s anti-involution campaign will make life very hard for most Chinese carmakers. As many as 100 carmakers out of more than 120 could end up being “pushed out” from the industry, she said.

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