Hundreds of Chinese electric vehicle manufacturers are collapsing under relentless price competition that’s forcing suppliers to sell below cost, slashing worker wages by 30%, and trapping the industry in what Beijing now calls “disorderly” commercial warfare.
The casualties include Ji Yue, a joint venture between internet giant Baidu and automaker Geely that folded within months despite deep-pocketed backing, leaving suppliers like marketing veteran Li Hongxing drowning in millions of dollars in unpaid debt.
China’s EV sector exploded from a decade of government subsidies and strategic support, transforming the country into the world’s largest electric vehicle market and helping manufacturers like BYD surpass Tesla in global sales. However, this boom spawned nearly 500 domestic auto brands at their peak around 2019, creating massive overcapacity where more than 150 brands and over 50 EV makers operate in a market that can’t sustain them all.
Manufacturing capacity utilization hovers around 50%, while average profit margins for Chinese automotive companies have plummeted from nearly 8% in 2017 to just 4.3% last year.
The price wars have created a vicious cycle that’s devastating the entire supply chain. Leading automakers are increasingly demanding that suppliers cut prices by at least 10% annually. One coating materials supplier in Wuhan was forced to slash prices over 40% just to retain business. Suppliers then compensate for these losses by reducing worker wages approximately 30%, hiring temporary staff, and pushing overtime to maintain minimal profitability.
Even after accepting these unfavorable terms, many suppliers face extended payment cycles that can stretch months beyond standard deadlines as carmakers use supply chain financing to shift financial risk onto partners.
Beijing launched an “anti-involution” campaign this year attempting to curb what Communist Party leader Xi Jinping describes as “chaotic, cut-throat price wars.” Authorities have summoned auto executives with warnings against initiating price battles, issued rules requiring payment within 60 days, and urged local governments to eliminate subsidies feeding overcapacity.
Last week, China tightened EV export licensing requirements to address concerns about manufacturers flooding foreign markets with low-priced vehicles that prompted tariffs from Europe, Mexico, and Canada.
Industry experts remain skeptical these measures will work. Carmakers can circumvent 60-day payment rules using the promissory notes they already employ extensively, while price competition continues through stealth tactics like launching new models at lower price points or upgrading existing vehicles without raising prices.
Simply eliminating excess capacity risks massive job losses in an industry that employs over 4.8 million people, potentially exacerbating China’s youth unemployment crisis.
The stories coming from the Chinese auto industry provide cautionary tales to operators like Massimo Group (NASDAQ: MAMO) operating in other markets to seek innovative ways to stay ahead of the competition without engaging in a race to the bottom in which all companies end up as net losers.
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