Overcapacity or Not?
release time：2026-03-14
GAO FENG ADVISORYJuly 2025
In recent years, a prevalent Western narrative claims that China’s manufacturing sector is in a state of "overcapacity", which is deemed detrimental to the rest of the world. A core corollary of this claim is that such "overcapacity" is a deliberate design of the Chinese government (and thus state-owned enterprises), framed as a premeditated strategic move.
The most frequently cited examples of this so-called overcapacity are electric vehicles (EVs), solar panels, photovoltaic equipment, batteries, steel, and wind turbines. The narrative argues that this state-planned and driven overcapacity will flood global markets, drive down prices, and force many businesses—especially Western ones—out of the market, ultimately harming the global economy. It further asserts that this is a government-led unfair practice aimed at global market domination that must be halted.
But is this narrative accurate? Does China’s manufacturing face genuine overcapacity? To what extent is the Chinese government involved in the formation of the so-called overcapacity? What implications does the current situation hold for the rest of the world? This analysis takes China’s EV industry as the core case to explore these questions.
The Development of China’s EV Industry: Policy Guidance, Market-Driven Competition
1. National Policy Guidance: A Push for Industrial Innovation and Green Development
Around 2012, the Chinese government identified EV development as a key national policy. The core motivations behind this policy were clear: to create new development pathways for the automotive industry, foster technological innovation, build new manufacturing systems and supporting ecosystems, and drive environmental improvement.
From 2010 to 2015, capable local governments (Beijing, Shanghai, Shenzhen, Hangzhou, Guangzhou, Chengdu, etc.) played a pivotal role in the early adoption of EVs, providing targeted support including local subsidies, free license plates, and free charging services. This support often prioritized locally manufactured EVs, particularly in public procurement—most electric buses and government fleet vehicles were sourced from local manufacturers. For example, Shenzhen added a 60,000 yuan local subsidy for locally produced pure electric passenger vehicles on top of national incentives in 2013; Shanghai and Hangzhou also launched generous local subsidy programs linked to local/regional manufacturing during this period.
2. Market-Driven Participation: Diverse Players Flock to the Industry
The introduction of national and local EV policies created clear market opportunities, attracting a diverse range of players to the industry—this was a market response, not top-down state planning:
Established automakers: Private or privatized SOE automakers such as BYD, Geely, Chery, and Great Wall Motor were early movers, leveraging their existing automotive expertise to develop EV capabilities, driven by entrepreneurial zeal and rapid decision-making.
New entrants (Internet "new forces"): Entrepreneurs with little to no automotive industry experience, mostly from the internet sector, recognized the huge market potential and founded EV companies. The most prominent are XPeng (He Xiaopeng), NIO (William Li), and Li Auto (Li Xiang), with many similar start-ups emerging in parallel.
SOE OEMs: State-owned automotive OEMs also participated in EV manufacturing, though at a slightly slower pace, and were not permitted to dominate the market—they were required to coexist and compete with private enterprises.
Foreign OEMs: The slowest to react, foreign automakers held prominent positions in China’s traditional auto market and had long-standing local teams, but their global headquarters failed to timely recognize the speed and intensity of China’s EV sector rise. Even with local team warnings, global decision-makers delayed action, leaving foreign OEMs ill-prepared for the industry transformation.
3. Explosive Capacity Growth: A Result of Widespread Market Competition
As various OEMs accelerated capacity building, China’s EV production capacity expanded rapidly—fueled by Chinese manufacturers’ well-known cost management advantages relative to international counterparts. According to the China Association of Automobile Manufacturers (CAAM):
2014: China’s EV production reached approximately 83,900 units;
2015: Production surged to around 340,000 units;
2024: Production hit 12.89 million units.
This rapid capacity buildup was the result of a large number of OEMs (regardless of ownership type) simultaneously recognizing market opportunities and competing for a share of the fast-growing sector—a classic manifestation of market economy principles, not state-planned production. This development model is analogous to the early stages of the U.S. automotive and oil and gas industries, where numerous companies flocked to emerging markets to compete for market share in a crowded landscape.
After a decade of development, natural market selection has occurred in China’s EV industry: many early players have been marginalized or eliminated, with the vast majority of these being private entrepreneurial companies—another reflection of market mechanisms at work.
Capacity Utilization and Global Demand: Rethinking the "Overcapacity" Narrative
1. Domestic Capacity Utilization: Polarization Between Leading Players and Smaller Manufacturers
While China’s EV production and sales have grown rapidly, domestic capacity utilization shows clear polarization:
CAAM data shows 2024 EV production of 12.89 million units and sales of 12.87 million units, with nearly balanced domestic production and sales;
At the 2025 China EV100 Forum, former Vice-Minister of Industry and Information Technology Su Bo stated that China’s built EV production capacity had exceeded 20 million units, resulting in an overall capacity utilization rate of just 64.5%;
Polarization detail: Leading players (BYD, Tesla, Chery, Xiaomi) achieved capacity utilization rates of over 90%, while 31 out of 78 automakers faced severe underutilization, producing fewer than 5,000 units per month.
2. Global Demand: China’s Production Meets Unmet Global Needs
The "overcapacity" narrative overlooks the global dimension of EV demand:
2024 global EV sales reached 18.24 million units, while China’s total EV production was only 12.89 million units—China’s production is far from meeting global demand;
Chinese EV suppliers are providing the world, especially Global South countries, with EV product choices that were previously unavailable. The increased supply is converting latent global demand into actual demand, offering price ranges and product options that were not feasible before;
Chinese EV manufacturers have accelerated exports as the sector matured: CAAM data shows China’s total automotive exports in 2024 were 5.86 million units, with 1.28 million (22%) being EVs; Chery alone exported 1.14 million vehicles in 2024.
3. Product Diversification: A Wide Price Spectrum for Global Consumers
Chinese EV manufacturers have expanded their product ranges over time, initially focusing on the mass and mid-market, and now increasingly producing high-end, premium-priced products. Compared to Western OEMs, Chinese automakers offer unique price-value trade-offs—often more affordable products with greater consumer choice, covering the entire price spectrum:
BYD: Competes across all price ranges, from the 69,800 yuan entry-level Seagull, to the 219,800 yuan mid-market Han, to the 1.68 million yuan high-end Yangwang U9;
Xiaomi SU7 Max: Industry analysts rate its performance as comparable to the Porsche Taycan Turbo, but it is priced at only about 20% of the Taycan.
This product diversification means Chinese EVs cater to consumer demand at all levels globally, driving greater market access and choice—especially for consumers in price-sensitive markets.
China’s Governance System and Market Mechanisms: Beyond the "State-Planned" Misconception
The Western narrative misrepresents China’s industrial development model by framing capacity growth as pure state planning. In reality, China operates a composite governance system:
The central government sets directional national strategies and policies, signaling development trends for the market;
Enterprises—private, mixed-ownership, and SOE—make independent strategic and investment decisions based on these market signals;
Local governments with financial resources provide targeted support (funding, incubation, supply chain and customer network matching) to early-stage enterprises, especially small and private ones, to help them survive and grow—this is supportive facilitation, not mandatory production planning;
SOEs are not permitted to dominate emerging sectors; they must compete on an equal footing with private enterprises, ensuring a level playing field.
After nearly five decades of reform and opening-up, market economy principles underpin development in most Chinese industrial sectors:
Hypercompetition is common, as entrepreneurs across the market simultaneously recognize and pursue the same opportunities;
Intense competition drives companies to rewrite price-value trade-offs, build extensive and efficient supplier ecosystems, and conduct rigorous technological innovation;
Natural market selection determines survival: the strongest players thrive and become leading enterprises in China and globally, while mediocre ones are eliminated—this is the core of market mechanism, not state control.
Implications for the Global Market
China’s EV industry development model and capacity growth have positive implications for the global economy, rather than the harm claimed by the overcapacity narrative:
Increased global product choice and price-value diversity: Chinese EVs cover all price ranges, particularly expanding low-to-mid market options for Global South countries, making electric mobility accessible to more consumers worldwide;
Benefits of technological innovation: Global consumers gain access to advancements in EV hardware and software driven by China’s intense industry competition, pushing the global automotive industry toward greener, more innovative development;
Partnership opportunities for the Global South: Leading Chinese EV companies are becoming key partnership targets for Global South countries, providing these nations with new pathways for industrial development and technological upgrading;
Global industry competition and upgrading: China’s EV development intensifies global competition in the automotive sector, driving Western and other international automakers to accelerate innovation and cost optimization—ultimately pushing the entire global EV industry forward.
Core Conclusion: No Genuine Overcapacity, Only Market-Driven Competition
The Western narrative of China’s "state-planned overcapacity" in manufacturing (taking EVs as the core example) is inconsistent with the facts:
China’s EV capacity growth is the result of policy guidance plus market-driven competition, not top-down state planning. The government’s role is to set strategic directions and provide early-stage support, while enterprise investment and production decisions are independent market choices;
Domestically, capacity utilization polarization is a natural outcome of market selection, with leading players operating at high capacity and inefficient small manufacturers facing underutilization—this is a normal market dynamic, not systemic overcapacity;
Globally, China’s EV production falls far short of meeting total global demand, and Chinese exports are converting latent global demand into actual demand, particularly for underserved Global South markets;
After nearly 50 years of reform and opening-up, market economy principles govern most of China’s industrial sectors, with hypercompetition, innovation, and natural selection driving industrial development.
The so-called "overcapacity" in China’s manufacturing is a misrepresentation of market-driven capacity growth and global demand dynamics. In reality, China’s industrial development model is delivering tangible benefits to the global economy—more product choices, lower prices, technological innovation, and new industrial development opportunities for the Global South.
About the Author
Edward Tse: Founder & CEO of Gao Feng Advisory Company, a pioneer in China’s management consulting industry. He built and operated the Greater China operations of two leading international management consulting firms (BCG and Booz) for 20 years, and has provided consulting services to hundreds of Chinese and foreign companies, investors, start-ups, public-sector organizations (both domestic and overseas) on all critical aspects of doing business in China and global business for Chinese enterprises. He has also advised various levels of the Chinese government on strategies, state-owned enterprise reform and Chinese companies' overseas development, as well as the World Bank and the Asian Development Bank. He is the author of hundreds of articles and six books, including The China Strategy (2010), China’s Disruptors (2015) and Mindset for Mega Changes 2 (2025) (《变局思维 2》).
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