This year, China's auto market demand is expected to fall below 6 million units, while the industry’s total production capacity has already reached 8 million, resulting in a surplus of 2 million. Moreover, there are still 2.2 million vehicles under construction. Over the next five years, an additional 8 million units of new capacity are planned or in the pipeline. At the recent National Development and Reform Work Conference, Ma Kai, Director of the National Development and Reform Commission, expressed concerns about the growing issue of overcapacity in the automotive sector.
Ma Kai’s worries are well-founded. According to a survey conducted by the commission, there are currently 117 car manufacturers across the country, but more than 90 of them produce fewer than 10,000 vehicles annually, making it difficult for them to achieve economies of scale. In the first ten months of this year, although the industry’s cumulative output increased by 9.18% year-on-year to 461.89 million units, overall profits dropped by 36.7%, and losses from unprofitable companies rose by 86.2%. The negative effects of overcapacity are becoming increasingly evident.
To address this, the National Development and Reform Commission plans to strengthen the enforcement of its automotive industry development policies next year. It will tighten market access, restrict new projects, and limit loans and land use for companies that fail to meet regulatory standards. Additionally, any newly built or expanded vehicle companies must develop their own brands and independently design products.
Concerns about overcapacity in the auto industry have been around for a long time. In 2000, officials were worried that the sedan industry might not complete the "Ninth Five-Year Plan," with up to 40% of production capacity going unused. By 2002, data from the State Economic and Trade Commission showed that by 2005, planned national auto production capacity would reach at least 6.22 million, far exceeding projected demand by 3.1 to 3.3 million units—nearly double the forecast. In 2003, another report suggested that by 2008, the planned production capacity would surpass 10 million, while the most optimistic estimate for annual demand was only 6 million.
Looking back today, these numbers may seem exaggerated, but they highlight the persistent challenges in managing supply and demand. In 1999, there was concern that the "Ninth Five-Year Plan" wouldn't be completed, yet the "Tenth Five-Year Plan" was actually finished three years ahead of schedule in 2002. Similarly, the 2003 prediction that sales would hit 6 million by 2008 turned out to be overly cautious, as China’s auto sales already reached 5.5 million this year.
Given the uncertainties in market growth, and especially considering that the auto industry is highly competitive, the role of market demand in regulating supply has become more critical. Previously, there was a tendency to downplay concerns about overcapacity. However, in 2003, when the National Development and Reform Commission listed overcapacity industries, the auto sector was included. But in 2004, when the government began regulating overheated sectors, the auto industry was surprisingly excluded from the list.
Nonetheless, the consequences of overcapacity are now clearly felt. Domestic auto market growth has slowed, price competition has intensified, and industry profits have plummeted. The sustainable development of China’s auto industry is now under serious pressure. Recently, the overseas roadshow team of Dongfeng Motor Group, which successfully listed in Hong Kong, reported that foreign investors are deeply concerned about the overcapacity and future prospects of the Chinese auto market.
To effectively manage overcapacity, both the “visible hand†of the government and the “invisible hand†of the market must work together. Market forces should play a central role. Currently, joint ventures, which dominate more than 70% of the sedan market, have become more cautious in expanding production, aligning their capacity plans more closely with actual demand. Private enterprises, constrained by investment limits, are also more cautious in scaling up. However, the blind expansion driven by certain state-owned enterprises—often for so-called “performance projects†funded mainly through bank loans—has drawn significant attention from regulators.
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