The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Sept 4 (Reuters Breakingviews) - China’s automotive industry must seem like an unstoppable force to outsiders. Local champions like BYD 002594.SZ and Geely have supplanted the international brands that first made the country the world’s largest car market in 2009. They sport the most advanced battery technology. And the People’s Republic is now the largest vehicle exporter, prompting the U.S. and the European Union to impose tariffs. Despite these advantages, scores of their carmakers are heading for a crash.

The ostensible problem is a vicious price war that has lasted more than two years. Rivalry has spiralled into what policymakers call “neijuan”, which translates literally to “involution”, a buzzword for a frantic, self-destructive struggle. The average price of a new car is likely to fall to around $24,000 this year for a basket of six automakers including Great Wall Motor 601633.SS and BYD; that’s 21% lower than 2021, according to estimates gathered by Visible Alpha. Carmakers also try to outdo one another with features like built-in hotpot cookers and multiple screens, free insurance and cheap loans.

That’s crushing the industry, especially automakers focused on gas guzzlers. Some, like Mitsubishi Motors 7211.T, have already left. Others are trying a different tack: Dongfeng Motor is taking its core business private and spinning off a nascent EV brand after sales fell 14% in the first half of 2025, prompting a profit warning. But smaller electric-car makers aren’t immune. Last year for the first time, more EV-focused manufacturers left the market than entered it, consultancy AlixPartners noted, tallying 16 such exits.

Big players are starting to feel the squeeze. After growing both market share and margins for much of the price war, BYD last week reported a nearly 30% drop in quarterly net profit. The world’s largest electric-vehicle maker followed that on Monday with its second consecutive fall in monthly production, the first time that happened since 2020. The $136 billion manufacturer had tried to boost sales with big discounts while splurging more on research and building new factories abroad. It was a similar story for Great Wall Motor, whose first-half net profit fell 10%.

PULLING PUNCHES

Beijing insists it wants to end this extreme level of competition, with President Xi Jinping railing against disorderly price cuts. Soon after, in July, the industry ministry told carmakers to pursue “rational competition”. Authorities are tweaking rules and guidelines, too.

Such measures have had little success. Worse, none of them addresses the root cause of the industry’s woes: overcapacity. Passenger vehicle sales reached 27.6 million last year, per consultancy Automobility, but production capacity hit 55.6 million units, more than 50% higher than a decade ago, according to AlixPartners.

Having twice the amount of factories and other fixed costs than needed can be a financial sinkhole. Perversely, it also spurs a vicious cycle where carmakers offer ever more incentives in the mostly futile hope of sustainably increasing market share, worsening their losses.

Options to rein in excess might seem clear: discourage building new factories, offload idle ones, and encourage industry consolidation. But politics gets in the way.

The electric-car industry, in particular, has become a strategic asset over the past 15 years. The price wars have even driven some Chinese manufacturers to hone world-beating technology, from batteries and assisted driving to automated production lines. International peers look on in envy: Ford Motor F.N CEO Jim Farley, who raved over newcomer Xiaomi’s 1810.HK Porsche lookalike, called his Chinese rivals “far superior”.

Curbing production capacity can be economically painful. Cash-strapped local governments have been actively encouraging carmakers to build or expand their facilities, offering incentives including tax breaks, land and subsidies. They have even been known to revive defunct groups. Even if a company is losing money, provincial authorities can still claim value-added tax for goods made. Greenfield investments and job creation are highly desirable, even if the carmaker never turns a profit, because local officials’ targets revolve around GDP growth.

Take Nio 9866.HK. When the unprofitable marque faced financial ruin in 2020, it received a $1 billion cash infusion from a group led by state-controlled companies in Anhui, where its factories are located – a move Bernstein researchers labelled a bailout. Last year, Nio won approval to build a third factory there, which will bring its annual capacity up to around 1 million cars; yet last year sales were only 221,970.

Another issue is jobs: the sector employs around 5 million people, according to Commerzbank economist Tommy Wu. Along with other manufacturing sectors, automakers have already been cutting employees’ shifts and pay, and swapping full-time for temporary workers, Reuters reports.

That’s just tinkering at the edges compared to what could happen. While companies don’t necessarily have armies of workers on standby for all their unused production lines, consolidation and closures could still cause significant job losses. That’s especially the case for both legacy carmakers like Dongfeng which might not have reduced capacity in line with rapidly contracting sales, and overly ambitious new entries whose sales never took off.

CRASHING OUT

There’s another problem: the dual effects of the price war and overcapacity leave carmakers vulnerable to a deterioration in sales. It’s no small risk. Domestic demand is fragile. True, China car sales picked up in the first half of 2025, growing 11.4% from a year earlier. But tax exemptions and the government’s cash-for-clunkers programme probably pulled forward purchases. The National Bureau of Statistics consumer confidence survey came in at 89 in July, below the 120-plus pre-pandemic levels, and Fitch expects sentiment will weaken in the second half.

Exports also face headwinds after sextupling to nearly 6 million units between 2020 and 2024. Overseas protectionism and plans by the top three exporters BYD, SAIC Motor 600104.SS and Chery to localise production will probably dampen demand for made-in-China vehicles.

If demand does weaken further, exits will accelerate and become more painful. Just five years ago, distressed auto assets could find buyers, who saw them as an affordable opportunity to enter the market. Now-bankrupt property giant China Evergrande, for instance, pieced together an entire autos business by acquiring fragments from failed luxury vehicle maker Faraday Future and Saab offshoot NEVS, a local sales and services group, and other bits and bobs. But recently, such deals – including one for China Evergrande New Energy Vehicle itself in 2024, and another for Baidu-backed WM Motors – have floundered.

Weaker players are less likely to have desirable intellectual property, and their production lines are worth little when there is excess supply. Consolidation may yet involve deals, but bankruptcies and redundances look hard to avoid. Absent a sudden huge surge in demand, swathes of China’s car industry are on a collision course with financial ruin.

Follow @KatrinaHamlin on X

(Editing by Antony Currie; Production by Shrabani Chakraborty)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))