China’s auto industry is in trouble. Years of overproduction, supported by government policies, have created an oversupply of vehicles. This has forced dealers to offer heavy discounts and rely on grey-market sales, hurting their profits.

Destructive Competition

To meet factory rebate requirements, dealers are slashing prices. Unsold cars are often manipulated: they might be registered as “sold” or exported as “used” vehicles. Some vehicles are abandoned or sold at auctions for only a small fraction of their original price. This situation has led to fierce competition and a cycle of oversupply. Local governments have made the problem worse by offering cheap land to attract factories, which has resulted in overcapacity across the country. While big companies like BYD and Geely may survive, many of China’s 129 electric vehicle (EV) and hybrid brands may not. Only about 15 are expected to remain by 2030. Beijing is hesitant to let automakers fail because of potential economic and political fallout. The crisis is not just hurting the auto sector; it impacts around 10% of China’s GDP. There are worries that cheap Chinese cars could flood European and North American markets. Although reforms are necessary, political and economic obstacles might delay these changes. Investors should brace for continued pressure on most Chinese automakers’ stocks due to this persistent oversupply. Recently, the China Automobile Dealers Association reported that dealer inventory has reached a 36-month high, with average vehicles unsold for over 75 days. This indicates that the oversupply issue is worsening, suggesting even tighter profit margins ahead.

Market Dynamics and Investment Opportunities

The market is clearly distinguishing between successful and struggling companies. This creates opportunities for pair trades. For example, consider buying put options on smaller EV companies that are losing money and are unlikely to survive. At the same time, look at call options on established players like BYD, which can withstand this price war. The Q2 2025 earnings reports showed that nearly a dozen smaller brands are running with negative gross margins. The threat of tariffs is increasing, which might trap even more inventory in China’s domestic market. The European Commission’s announcement on September 10, 2025, to speed up its anti-dumping investigation is a big warning for automakers targeting European exports. This situation is reminiscent of the solar panel oversupply crisis in the late 2010s, which led to significant industry consolidation and many bankruptcies. This turmoil is spreading throughout the entire supply chain, affecting everything from battery manufacturers to steel producers. We are already seeing weak demand for lithium carbonate, with futures down over 12% since August 2025 due to concerns about slowing orders. This presents an opportunity to short raw material suppliers heavily tied to the Chinese auto sector. While the overall outlook is negative, we must be cautious about sudden government interventions. Beijing’s hesitation to allow major failures could lead to unexpected bailouts or forced mergers, resulting in extreme volatility and potential short squeezes on heavily shorted stocks. Therefore, bearish positions should be managed with tight stop-loss orders to safeguard against sudden price changes driven by policy decisions. Create your live VT Markets account and start trading now.

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