In mid-March, newlywed Lisa joined the production line at a just-built electric vehicle plant of Li Auto, a star of China’s burgeoning EV industry. She hoped to help cover the couple’s living expenses in Beijing, but she worked only a dozen days in April and three in May.
“We were told that our pure electric vehicle sales are weak due to the bad [business] conditions, so the company has to cut production,” said the 27-year-old, who only gave her English name. She added that more than 1,000 workers were told they could either resign or wait it out on a minimum wage until things get better.
The pressure on Chinese authorities to keep Lisa and her colleagues on the job is threatening to worsen trade tensions between China and the West. With Chinese consumers unwilling or unable to buy all the goods produced by their country’s industrial sector, the U.S. and European Union fear that Beijing will flout global trade rules and flood their markets with cheap state-subsidized exports.
The White House last month announced a tariff increase on Chinese EVs to 100%, as well as hikes on solar panels, semiconductors and certain steel and aluminum products, to counter “unfair trade practices.” The EU is expected to soon conclude its own anti-subsidy probe that could result in new duties.
While countries in Southeast Asia and beyond are bracing for the ripples, China insists the Western concerns are “groundless.” President Xi Jinping said in Paris in May that China’s new energy sector “represents advanced production capacity, which not only enriches global supply and alleviates global inflationary pressures but also makes significant contributions to global efforts in addressing climate change and green transformation,” according to state news agency Xinhua. “There is no such thing as ‘China’s excess production capacity problem.'”
But many industry players have a sense of urgency. At a recent meeting organized by the China Association of Automobile Manufacturers, Yao Xiaodong, secretary general of a “new energy vehicle” industry alliance in the Yangtze River Delta region, said Chinese EV manufacturers could “either go overseas or go bust.”
China is now home to at least 77 automakers and 129 vehicle brands — too many, experts say, even for the world’s largest car market. As capacity utilization rates drop to levels not seen since the depths of the COVID-19 pandemic, how China and its companies confront the challenge could affect the fate of the domestic economy as well as fragile international relationships.
Officials seem aware China is walking a fine line. In May, a vice commerce minister held a closed-door meeting with experts in Shanghai and asked how to deal with the West’s overcapacity complaints, one attendee said on condition of anonymity. “Experts said at the meeting that they think the fundamental issue with the claim is whether the large quantity of products sold to these markets is based on subsidies.”
Like those of Li Auto, most Chinese EVs are produced in new facilities eligible for subsidies from local governments and cheap credit from state-directed banks. Coupled with sparks of innovation from some competitors, the perks have helped fuel the growth of the industry while also creating what many see as an unsustainable number of players in a country plagued by a property crisis that has sapped consumer confidence.
“Due to the incentives provided by local government subsidies, numerous companies have entered the green energy technology sector despite lacking the qualifications,” said Chen Zhiwu, a professor of finance at the University of Hong Kong (HKU). “Without such subsidies, a significant portion of these companies would have faced financial collapse much earlier.”
Even with workers like Lisa putting in fewer shifts, overcapacity warnings are flashing in the auto sector as well as other industries, such as steel. Official data shows the capacity utilization rate for auto factories plunged to 64.87% in the first quarter of this year, far below the benchmark of 75%. Private research from Gasgoo, a Shanghai-based automotive industry information service, showed the capacity utilization rate for new energy vehicles in 2023 was only around 47.5%.
Average utilization rates for power batteries and energy storage batteries fell below 60% and 55% respectively in 2023, according to a November communique by CEOs of China’s leading battery manufacturers, including CATL.
