China is sending its world-beating auto industry into a tailspin

Visitors can choose from some 5,000 vehicles. Locally made Audis are 50% off. A seven-seater SUV from China's FAW is about $22,300, more than 60% below its sticker price.

These deals – offered by a company called Zcar, which says it buys in bulk from automakers and dealerships – are only possible because China has too many cars.

Years of subsidies and other government policies have aimed to make China a global automotive power and the world's electric-vehicle leader. Domestic automakers have achieved those goals and more – and that's the problem.

China has more domestic brands making more cars than the world's biggest car market can absorb because the industry is striving to hit production targets influenced by government policy, instead of consumer demand, a Reuters examination has found. That makes turning a profit nearly impossible for almost all automakers here, industry executives say. Chinese electric vehicles start at less than $10,000; in the U.S., automakers offer just a few under $35,000.

Most Chinese dealers can't make money, either, according to an industry survey published last month, because their lots are jammed with excess inventory. Dealers have responded by slashing prices. Some retailers register and insure unsold cars in bulk, a maneuver that allows automakers to record them as sold while helping dealers to qualify for factory rebates and bonuses from manufacturers.

Unwanted vehicles get dumped onto gray-market traders like Zcar. Some surface on TikTok-style social-media sites in fire sales. Others are rebranded as "used" – even though their odometers show no mileage – and shipped overseas. Some wind up abandoned in weedy car graveyards.

These unusual practices are symptoms of a vastly oversupplied market – and point to a potential shakeout mirroring turmoil in China's property market and solar industry, according to many industry figures and analysts. They stem from government policies that prioritize boosting sales and market share – in service of larger goals for employment and economic growth – over profitability and sustainable competition. Local governments offer cheap land and subsidies to automakers in exchange for production and tax-revenue commitments, multiplying overcapacity across the country.

"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," said Rupert Mitchell, an Australia-based macroeconomics commentator who previously worked at a Chinese EV startup. "Ultimately what happens is that it makes the existing auto sector double down on investment."

This account of how oversupply is enfeebling China's auto market even as the industry emerges as a world power is based on a Reuters review of thousands of car-sales listings and hundreds of government documents, state-media reports, court filings and consumer complaints. Reporters also interviewed some 20 industry players, including dealers, buyers, analysts and manufacturing executives.

Chinese brands now far outpace foreign rivals in delivering new models, Reuters has reported. But the same government policies that drove explosive growth and innovation in automaking are causing lose-lose transactions throughout the domestic sales chain.

China's industry and commerce ministries didn't respond to questions about the challenges facing the sector, the prospects for consolidation, and the role of government policies in fueling oversupply. China's top economic planning agency, the National Development and Reform Commission, and the State Council Information Office, which handles media queries for the central government, didn't respond to similar requests for comment.

The brewing crisis has larger implications for China's economy, where the auto industry and related services comprise about one-tenth of gross domestic product. Chinese policymakers previously rejected accusations of overcapacity by U.S. and European officials worried about cheap imports. But in recent months, Chinese officials have vowed to curb price wars in sectors including EVs and solar.

The industry's slack is striking: Chinese automakers have factory capacity to produce twice the 27.5 million cars they made last year, according to consultancy Gasgoo Automotive Research Institute. The problem is especially acute in gasoline vehicles, for which demand has cratered in the past few years as Beijing encouraged EVs. At the same time, the number of EV factories proliferated as companies and local authorities piled in. AlixPartners, another consultancy, predicts only 15 of the 129 EV and hybrid brands in China will be financially viable by 2030.

China's price war is now in its third year. The only escape would involve letting many automakers fail, some analysts say. But many Chinese officials have resisted that tough-love path, which industry analysts say would risk mass layoffs and falling consumer spending.

That leaves automakers and local governments locked in a downward spiral, said Yuhan Zhang, principal economist at The Conference Board's China Center, a research group.

"They're feeding each other, reinforcing each other, and that could trap the market in a vicious cycle," he said.

It's not just Chinese automakers that are affected. Foreign brands are struggling to keep a foothold in the market, accounting for 31% of car sales in China in the first seven months of this year, versus 62% in 2020, according to the China Association of Automobile Manufacturers (CAAM). Overseas governments, especially in Europe, are fretting that an influx of cheap Chinese-made cars could ruin their domestic industries. The U.S. has all but banned Chinese cars over concerns about national security and unfair competition.

RACE TO LURE EV FACTORIES

The seeds of the market mess were planted in Beijing, where national policymakers as far back as the 1990s wanted to put China in the driver's seat of one of the biggest shifts in automaking since the invention of the internal-combustion engine: the rise of electric vehicles.

In 2009, Beijing launched a program to encourage automakers to produce EVs and consumers to buy them, backed by billions of dollars in subsidies.

By 2017, EVs hadn't taken off. That year, Chinese government officials drafted a car-making policy blueprint. The 13,000-character document — the "Medium- and Long-Term Development Plan for the Automotive Industry" — outlined a goal of producing 35 million vehicles a year by 2025, roughly double the U.S. annual sales record.

Chinese authorities had been grappling with an overheated property sector, and began to discourage excess investments. The automaking blueprint became a timely alternative economic pillar for local governments that had been reliant on land sales and real-estate tax revenue.

The 2017 plan helped fuel a scramble by local authorities to woo EV makers. And by last year, China came close to the target, building more than 31 million vehicles, according to industry body CAAM.

This competition created a playbook across China: Local governments provide inducements to automakers and demand production and tax-revenue targets in return. Automakers often focus more on hitting those targets than turning a profit. Over time, manufacturers that might fail in other markets are sometimes kept afloat by local governments that have a vested interest in their survival.

Betting on the right automaker can pay off massively. In 2021, the county government of Changfeng, in Anhui province, attracted auto giant BYD 002594.SZ with cheap land. In return, the county, whose main industry was making traditional flatbread, got a BYD mega-factory. Over five years, the EV maker purchased 8.3 square kilometers of land in Changfeng at an average price 40% below that paid by other buyers, Reuters determined from property-sales filings published by China's government. BYD didn't address questions about the arrangement and other matters raised in this report. A person reached by phone at Changfeng county's propaganda office said some of the reporting was inaccurate and declined to elaborate.

In 2023, the year after BYD started production in Changfeng, the county's economic growth outpaced the national rate by 9.1 percentage points. Last year it remained 5.6 percentage points higher.

The official People's Daily newspaper lauded Changfeng in March for its remarkable growth, citing BYD as a major factor.

Two Communist Party officials in Changfeng tied to the BYD project, Fan Shaobin and Li Mingshan, received promotions to higher levels of government in 2024, notices published by the party's Anhui Provincial Committee show. The Anhui committee wasn't reachable for comment, and Reuters was unable to contact Fan and Li directly. Neither the government of Hefei city, for which both officials now work, nor the Hefei municipal party committee responded to questions about the matter.

In 2022, smartphone maker Xiaomi 1810.HK began buying land in Beijing's Yizhuang district for an EV factory. By 2024 it had purchased more than 206 soccer fields' worth at an average price 22% below the rate others paid for industrial land, land-sales filings show. The city of Beijing required the plant to generate minimum annual revenue of 47 billion yuan, about $6.6 billion, at full production, according to the filings.

Xiaomi told Reuters it followed an open bidding process and didn't receive discounts or incentives for the land. Xiaomi was the sole bidder, according to tender information published by Beijing's municipal government. City officials didn't respond to questions.

The sweeteners continue to flow.

In June, Guangzhou officials published a policy document that said the city wanted to foster up to three makers of "new energy vehicles," which include fully electric cars as well as hybrids, to each produce 500,000 vehicles a year. In return, Guangzhou would award up to 500 million yuan (about $70 million) annually to each automaker that built new production lines and made 100,000 vehicles within three years. The city didn't respond to a request for comment.

At least six other local governments between 2023 and 2025 issued policies to entice automakers to increase output, policy documents show.

In May, Chinese authorities started to sound alarm bells about auto price wars, warning of unsustainable competition. This summer, President Xi Jinping rebuked provincial officials, questioning why every province was racing to invest in a handful of technologies such as EVs and artificial intelligence.

AUTOMAKERS CAN'T STOP PEDALING

The problem of excess capacity leading to overly ambitious sales goals isn't unique to China. In the early 2000s, General Motors, Ford and Chrysler had too many factories cranking out too many cars, and eventually closed more than a dozen U.S. plants.

But pressure to hit sales targets and gain market share is greater in China, industry analysts and former executives say. Lately, industry players have been using the term "involution" to describe competition that becomes self-destructive and incentivizes irregular practices.

Vehicle manufacturers in China are driven to keep selling and producing, even at deep losses, because this ensures cash flow, which is crucial to survival, said Liang Linhe, the chairman of Sany Heavy Truck, one of China's largest truck makers.

"It's like riding a bicycle: As long as you keep pedaling, you might feel exhausted, but the bike stays upright," he told Reuters.

With so many carmakers pedaling faster as losses mount, there is growing talk among some industry analysts of a shakeout. In recent months, EV brand Neta ceased operations when its parent entered bankruptcy proceedings. Last year, Ji Yue Auto, a joint venture of Chinese tech company Baidu and automaker Geely, slashed jobs and announced a restructuring, citing fierce competition.

Still, three industry figures and two analysts told Reuters an abrupt shock is unlikely: Consolidation could take years, and local governments would probably support flailing automakers, containing the fallout.

"The problem of excess capacity in China is a systemic problem," said Michael Pettis, senior fellow at research center Carnegie China.

He Xiaopeng, the CEO and co-founder of Chinese EV startup Xpeng, predicted in 2023 that each automaker would need to sell 3 million cars a year by 2030 to survive — and that only eight firms would be left standing. Xpeng, which didn't respond to Reuters questions, sold 190,000 cars last year.

A few big players are hitting or approaching those volumes and appear positioned to benefit in a shakeout. In January, Geely said it wants to sell 5 million vehicles annually by 2027, more than double the 2.2 million it sold last year. Geely didn't respond to a request for comment about whether that target still applied. Industry leader BYD has also set ambitious targets for 2025, though its expansion has been slowing. In August, its quarterly profit fell for the first time in more than three years. Internally, BYD has scaled back its original plan to sell 5.5 million vehicles and now expects to move at least 4.6 million, Reuters reported this month.

Most industry players are selling a fraction of those volumes, and are still cranking up production – in at least three cases at the behest of government officials.

Last year, as state-owned automakers such as Changan, Dongfeng and FAW fell behind their private peers in the EV race, the national regulator of government-owned firms announced that it wanted the state companies to grow market share and production, rather than focus on profitability. Neither the automakers nor the regulator, the State-owned Assets Supervision and Administration Commission, addressed Reuters questions about the directive.

In July, Changan said it wanted to quadruple sales of new-energy vehicles by 2030.

"We will work towards becoming a top ten global and world-class auto brand," chairman Zhu Huarong said at a July 30 press conference.

'THE MARKET WILL DIE!'

The flood of new cars has made it harder for dealers to turn a profit, said Chen Keyun, a retired dealer in Jiangsu province. His assessment was backed up by four dealers who spoke on condition of anonymity.

Chen said the problems – such as dealers selling new cars at losses and offloading them to traders who sell them on as zero-mileage "used" cars – are rooted in China's "production-oriented" industrial model. Automakers have ignored the true level of demand but kept expanding capacity and increasing sales targets, compelling dealers to take more inventory, he said.

Just 30% of dealers are profitable, an August survey by the China Automobile Dealers Association (CADA) found.

In June, dealer groups in Henan and Sichuan provinces and the Yangtze River Delta aired their grievances publicly.

"We urge automakers to formulate sales guidance policies that align with market realities," the Henan Automobile Industry Chamber of Commerce said in an open letter to unspecified automakers. "If the sales channels collapse the market will die!"

Larger dealerships overpurchase inventory to hit automakers' sales targets and obtain factory rebates, Chen said.

"If you have managed to sell 16 out of the 20 units targeted for the month, what will you do with the remaining four units on the very last day of the month?" said one dealer in Jiangsu. Selling those cars, even at fire-sale prices, would mean qualifying for a bonus of around 80,000 yuan, or $11,200, and put him close to break-even.

Lang Xuehong, deputy secretary-general of the CADA industry group, acknowledged dealers were selling at up to 20% below their cost. This was "unprecedented," she told Reuters in a June 24 interview.

Reuters reported in July that EV brands Neta and Zeekr inflated sales in recent years, with Neta doing so for more than 60,000 cars. The automakers arranged for cars to be insured even before they were sold, so the vehicles could be formally booked toward monthly sales targets.

Neta's parent, Hozon, which is in bankruptcy administration, wasn't reachable for comment. In July, Zeekr said the cars had been insured with mandatory traffic insurance to ensure their safety while exhibited, and that they were legally new when sold to buyers.

Neta and Zeekr exemplify industrywide padding of sales figures, much of it involving zero-mileage used cars that have been insured and booked as sold, dealers and analysts say. Dealers and traders export those cars as used, often with the encouragement of local governments, or sell them domestically through gray markets.

In June, four regional dealer groups called automakers' incentives "a disguised way of forcing dealers to falsify sales volume," without identifying car companies.

VEHICLE SURPLUS DRIVES LIVESTREAM SALES

At the Chengdu mall, Wang Lihong navigates a rooftop parking lot on a scooter while clutching a selfie stick, capturing video for social media. Wang is a livestreaming host for Zcar, one of the gray-market traders flipping brand-new vehicles that dealers couldn't sell.

Hosts like Wang broadcast on platforms such as Douyin, China's version of TikTok. Wang recently told his 1.25 million followers that Zcar was Sichuan province's biggest seller of zero-mileage "used" cars. He said they are usually available in March, June, September and December, "when dealers rush to meet the quarter or annual sales targets set by the automakers for cash rebates."

"There's no car that can't be sold, only a price that isn't right," Wang said in a livestream in July.

Zhou Yan, Zcar's marketing director, told Reuters it can sell at deep discounts because it buys some vehicles directly from automakers in batches.

When Reuters visited Chengdu in June, livestreamers were touting a batch of GM's Chevrolet Malibus. Zhou said Zcar had acquired more than 3,000 Malibus in China from SAIC-GM, the U.S. automaker's Chinese joint-venture entity, and was selling them for under $14,000 apiece, down from a sticker price of $24,000.

GM told Reuters that "authorized dealers are the only official channels for our vehicle sales", and that Zcar "isn't a dealer affiliated in any way" with SAIC-GM. It declined to elaborate.

Zcar subsequently told Reuters its subsidiary, Cheshi, had bought 3,428 Malibus primarily for wholesale distribution to dealerships, without specifying from whom.

Zcar added that it offers "popular, attention-grabbing models to attract customers to our stores" and often sells them at a loss. Its trade in the Malibus hasn't been previously reported.

Some Audis were priced at half off when Reuters visited. Audi declined to comment on Zcar's practices but told Reuters it doesn't support gray-market trade, which harms the long-term value of its vehicles.

ZOMBIE CARS FILL GRAVEYARDS

Some brand-new vehicles that aren't sold end up in automotive graveyards.

Local governments have strained to clean up abandoned-car lots, which consume land and create environmental hazards.

Other cars end up parked for the long term on auction sites, including those run by e-commerce giant Alibaba. Many get no bidders. A Reuters review of Alibaba listings identified more than 5,100 auction notices this year for brand-new BYD cars that had been insured and registered, up from 61 in 2024. Alibaba and BYD didn't address questions about the listings, which haven't been previously reported.

Chinese courts, too, have been holding auctions for new and unsold cars belonging to defaulted dealers. One Alibaba listing in April 2024 that advertised a batch of 94 cars made by Dongfeng Honda, the Japanese automaker's joint venture, showed photos of vehicles parked indoors. The white body of one was coated with grime. The front seats were covered in plastic sheets. Dongfeng didn't respond to questions; Honda 7267.T said it couldn't comment on the activities of its authorized dealers.

Another clean-up ordered by a Shenzhen court involved nearly 2,000 cars built in 2018 by Denza, now fully owned by BYD. The vehicles were parked in Chengdu, Guangzhou and at BYD's factory in Shenzhen after the buyer, ride-hailing firm Guizhou Qianxi, got into a dispute with Denza in 2020 over rebates and unspecified contractual matters, previously unreported court filings show. BYD didn't address questions about the matter, and Guizhou Qianxi couldn't be reached for comment.

The vehicles sat collecting dust until 2023, when the court put them on auction. Court-appointed assessors found the cars had been barely driven and their interiors were brand-new. They had been left in various locations – including an area next to a grocery store where villagers hang their laundry.

The cars soon began appearing on social-media platforms. Livestreamers were selling the vehicles for as little as $9,000 – a quarter of their original price.