The Structural Risks in China's EV Industry: Overcapacity, Margin Compression, and Strategic Rebalancing

China's electric vehicle (EV) industry, once a symbol of technological ambition and industrial might, now faces a crisis of overcapacity that threatens to undermine its global leadership. According to a report by The Asia Observer, production utilization in the sector dipped below 50% in 2024, with some factories operating at as low as 5.1% capacityExplaining overcapacity in China's EV sector, [https://www.valueadded.tech/p/explaining-overcapacity-in-chinas]^[3]. By 2025, installed production capacity is projected to reach 36.61 million vehicles, yet actual utilization is estimated at just 14.47%, leaving over 30 million units of potential output unusedChina’s EV Overcapacity Crisis Signals Strategic Realignment in Asian Auto Sector, [https://theasiaobserver.com/chinas-ev-overcapacity-crisis-signals-strategic-realignment-in-asian-auto-sector/]^[1]. This underutilization reflects a stark disconnect between China's industrial ambitions and the realities of market demand.

The root cause lies in aggressive expansion driven by state-backed incentives and local government subsidies. Over 200 EV producers have emerged, many of which rely on price wars to capture market share. BYD and others have slashed prices to unsustainable levels, collapsing average profit margins in the auto industry to just over 4% in 2024Explaining overcapacity in China's EV sector, [https://www.valueadded.tech/p/explaining-overcapacity-in-chinas]^[3]. While such strategies may secure short-term gains, they risk destabilizing the sector. Local governments, rather than allowing market forces to weed out underperforming firms, continue to bail them out, preventing the natural consolidation that would restore balanceExplaining overcapacity in China's EV sector, [https://www.valueadded.tech/p/explaining-overcapacity-in-chinas]^[3].

This overcapacity is not confined to China. It is reshaping global supply chains and trade dynamics. Chinese automakers are redirecting surplus production to Southeast Asia and Africa, where low-cost models threaten to displace local industriesChina’s EV Overcapacity Crisis Signals Strategic Realignment in Asian Auto Sector, [https://theasiaobserver.com/chinas-ev-overcapacity-crisis-signals-strategic-realignment-in-asian-auto-sector/]^[1]. The U.S. and EU have responded with steep tariffs on Chinese EVs, but these measures are largely symbolic, as the surplus is absorbed by developing marketsChina’s EV Overcapacity Crisis Signals Strategic Realignment in Asian Auto Sector, [https://theasiaobserver.com/chinas-ev-overcapacity-crisis-signals-strategic-realignment-in-asian-auto-sector/]^[1]. Meanwhile, China's control over rare earth minerals—critical for EV motors and components—has raised alarms. Europe, which imports 98% of its rare earth magnets from China, faces acute vulnerabilityChina’s EV Overcapacity Crisis Signals Strategic Realignment in Asian Auto Sector, [https://theasiaobserver.com/chinas-ev-overcapacity-crisis-signals-strategic-realignment-in-asian-auto-sector/]^[1]. This has pushed automakers to explore alternatives, such as older motor designs that reduce reliance on rare earth materialsChina’s EV Overcapacity Crisis Signals Strategic Realignment in Asian Auto Sector, [https://theasiaobserver.com/chinas-ev-overcapacity-crisis-signals-strategic-realignment-in-asian-auto-sector/]^[1].

The central government has called for “self-discipline” to curb “involution”—excessive, unproductive competition—but enforcement remains unevenExplaining overcapacity in China's EV sector, [https://www.valueadded.tech/p/explaining-overcapacity-in-chinas]^[3]. Only a handful of automakers adhere to government-mandated payment schedules for suppliers, exacerbating financial strain across the supply chainExplaining overcapacity in China's EV sector, [https://www.valueadded.tech/p/explaining-overcapacity-in-chinas]^[3]. The result is a sector rife with instability, where systemic risks loom large.

Yet, the global automotive industry is adapting. Multinational automakers are increasingly integrating Chinese EV technology into their strategies. Audi, for instance, developed the AUDI E5 Sportback using batteries and software from its Chinese partner SAIC, cutting development time to 18 months'China Inside': How Chinese EV tech is reshaping global auto design, [https://www.reuters.com/business/autos-transportation/china-inside-how-chinese-ev-tech-is-reshaping-global-auto-design-2025-09-11/]^[2]. Volkswagen and Toyota have followed suit, forming joint ventures with Xpeng and GAC to co-develop China-specific models'China Inside': How Chinese EV tech is reshaping global auto design, [https://www.reuters.com/business/autos-transportation/china-inside-how-chinese-ev-tech-is-reshaping-global-auto-design-2025-09-11/]^[2]. This trend, dubbed “China Inside,” mirrors the “Intel Inside” strategy of the 1990s, where global firms leveraged Chinese platforms to accelerate production'China Inside': How Chinese EV tech is reshaping global auto design, [https://www.reuters.com/business/autos-transportation/china-inside-how-chinese-ev-tech-is-reshaping-global-auto-design-2025-09-11/]^[2].

For investors, the implications are clear. Overcapacity and margin compression in China's EV sector will force a reallocation of capital and resources. Companies that can navigate this transition—whether by securing critical resources, adopting vertical integration, or forming strategic partnerships—will outperform. Tesla's in-house battery production and Ford's pursuit of Chinese EV platforms exemplify this shift'China Inside': How Chinese EV tech is reshaping global auto design, [https://www.reuters.com/business/autos-transportation/china-inside-how-chinese-ev-tech-is-reshaping-global-auto-design-2025-09-11/]^[2]. Conversely, firms reliant on outdated manufacturing techniques or uncompetitive supply chains face obsolescence'China Inside': How Chinese EV tech is reshaping global auto design, [https://www.reuters.com/business/autos-transportation/china-inside-how-chinese-ev-tech-is-reshaping-global-auto-design-2025-09-11/]^[2].

The broader challenge lies in balancing China's dominance with global supply chain resilience. As the World Economic Forum notes, the future of EV supply chains hinges on diversification and innovationThe future of the EV supply chain amid US-China tensions, [https://www.weforum.org/stories/2025/01/future-ev-supply-chains/]^[4]. For China, the path forward requires painful but necessary rebalancing: curbing overcapacity, fostering consolidation, and aligning production with sustainable demand. For the rest of the world, it demands a rethinking of industrial strategies to mitigate dependency on a single market.

In this high-stakes environment, long-term value creation will belong to those who adapt—not just to China's EV overcapacity, but to the structural transformation it has set in motion.