China has too few EV plants, not too many
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Fast-growing Chinese EV specialists such as Xpeng appear to be selling more cars than their factories are set up to make.
PHOTO: REUTERS
BEIJING – To hear some people talk about it, the problem with China’s car industry is a tsunami of state-directed spending on electric vehicles (EVs).
“China is investing way too much in new automotive capacity,” Brad Setser, a former trade adviser to the Biden administration, wrote recently.
The success of its EV exports is explained by factories that can make 50 per cent more cars than the country can buy, according to The Wall Street Journal.
Overseas sales are patching up the problems in a policy of industrial excess, the Financial Times wrote.
Beijing is using EV exports to solve domestic overcapacity, European Commission president Ursula von der Leyen said in 2025.
It is a remarkably consistent message that manages to completely ignore the ways that the car industry is changing, in China and around the world.
In 2016, 99 per cent of China’s auto sales were conventional vehicles whose only electrical connections were a plug for your mobile phone and a cigarette lighter. In May 2026, that share fell to just 36 per cent.
Talking about “capacity” as if that shift had not happened muddies the picture to the point of meaninglessness. Chinese consumers bought nearly 17 million battery-electric and plug-in hybrid cars in 2025. Dedicated EV production lines, however, are set up to produce only about 15 million vehicles.
Add in mixed factories built to turn out both conventional and electric cars, such as those owned by Geely Automobile Holdings, and the EV sector can perhaps turn out 25 million vehicles a year.
That looks nothing like overcapacity. With domestic EV sales alone expected to amount to between 17 million and 20 million cars in 2026, utilisation would be a thoroughly normal 70 per cent to 80 per cent without a single exported car.
Fast-growing local EV specialists such as Xiaomi, Nio, Li Auto and Xpeng appear to be selling more cars than their factories are set up to make, a sign of red-hot production lines struggling to keep up with consumer demand.
Overcapacity certainly exists, but it is in exactly the place where many analyses refuse to see it: in incumbent state-owned enterprises and their foreign-owned joint venture partners. Having slipped behind private Chinese EV companies in pivoting to batteries, they have been left with an archipelago of underused engine plants.
SAIC Motor, owned by Shanghai’s municipal government and running major joint ventures with Volkswagen (VW) and General Motors (GM), is an illustrative example.
Its Wuling joint venture with GM, maker of the dinky Hongguang mini EV and overwhelmingly producing electrics these days, sweated a 95 per cent utilisation rate in 2025.
Its other GM and VW ventures, which focus on local variants of overseas brands using internal combustion engines (ICE), are a different story: Utilisation was just 37 per cent and 55 per cent respectively.
Wholly owned plants that run a mix of EVs and conventional vehicles sit somewhere in the middle.
Sales of foreign brands in China have been falling precipitously of late, but not because of any nationalistic plot to protect the local team. The product ranges of foreign carmakers, which have often been slower to electrify than in their home markets, have simply failed to keep up.
Just 3.6 per cent of VW’s China sales in 2025 were electric, far below the 19 per cent it achieved in Europe. In a market that is hungry for new EV models, it is little wonder that VW’s engine-heavy Chinese line-up has lost momentum.
Importantly, you can see the same pattern in state-owned marques, which you might have expected to be the beneficiaries of Beijing’s largesse. Sales of own-brand ICE models by JAC Group, Dongfeng Motor Group, BAIC Motor and Haima Automobile have all fallen by two-thirds or more since their peaks around 2016.
Chinese consumers have not stopped buying foreign cars. They have stopped buying petrol cars.
Far from being the victims of predatory Chinese overcapacity, it is often foreign firms that are responsible for it.
Nissan Motor had the ability to produce 1.7 million cars in China in 2023, the last time it disclosed a figure – but even then, it sold barely a third of that number. It has since closed some plants and written down investments, but appears to still be holding on to significant underutilised capacity, hoping factories can be repurposed to export cheap EVs to the Americas.
Much as European and US policymakers tempted towards further protectionist moves might wish otherwise, little points to state industrial policy. To the contrary, this looks like nothing so much as the normal and healthy capitalist process of creative destruction as a radically new technology uproots an incumbent one, leaving a rust belt that established firms cling to for too long in the hope of staving off inevitable write-downs.
There is certainly excess in China’s car industry, but not where you would think. China does not have too many EV plants – it has too few. BLOOMBERG
