The Secret Behind the Global Auto Crisis (and What China Has to Do with It)

Welcome to Issue #78 of The German Autopreneur!

Two news stories reached us from China last week:

1. Xi Jinping criticizes that too many provinces are investing in AI and EVs

2. China tightens export controls on battery technologies

These stories might seem unrelated at first. But they're part of a much bigger picture.

Today I want to piece this puzzle together. It's about China's economic system. About geopolitics. And how all of this triggered the current crisis hitting the global auto industry.

How China's Real Estate Bubble Hit the Auto Industry

Everything started in 2021 with the collapse of property giant Evergrande. It marked the beginning of China's real estate crisis. This sector had driven China's growth for decades.

The old economic model suddenly stopped working. For years, Chinese banks had pumped loans into housing construction. Rising property values made consumers feel wealthier. So they spent more.

When the bubble burst, consumer spending collapsed. High-end products like German cars took the biggest hit.

As a result, China was at risk of falling into a deflationary spiral. Falling demand. Dropping prices. Rising unemployment.

The Chinese leadership faced a dilemma: Where would growth come from if real estate no longer worked as the economic engine?

China's answer? The state redirected capital flows away from real estate. Instead, it pushed capital into manufacturing. Especially future industries like electric cars.

Here's the crucial difference from previous economic crises. In Japan and the West, banks simply cut lending after bubbles burst.

China took a different approach. The state has enormous influence over banks. It deliberately steered capital flows toward specific sectors. But this came with consequences.

The Race Between Provinces

What started nationally became a competition between provinces. Chinese provinces traditionally compete for growth. Economic performance is directly determined by the careers of local officials. If your province grows faster than others? You get promoted. If it grows slower? Your career is over.

The central government gave the green light for electric mobility. The result? Provinces immediately started outbidding each other with subsidies and support programs.

Every province wanted to become the next EV hub. New production centers emerged across the country. Actual demand? That barely mattered.

The result: massive overproduction. China can produce 54 million cars annually. Only 27.5 million actually get sold.

Just 15% of the 70 active automakers reach 70% capacity utilization. That's the threshold where profitability becomes possible.

Then Came the Price War

When supply and demand diverge this much, a price war inevitably follows. In China, it has reached unprecedented levels.

BYD has cut its prices by 32% since 2023. Smaller manufacturers had to follow.

The consequences are devastating. Listed Chinese automakers now have net profit margins of just 0.83%. In 2019, it was 2.7%.

Xi Jinping Steps In

This development forced the Chinese leadership to act. Xi Jinping criticized the overinvestment very directly.

He questioned whether all provinces should invest in the same technologies. He specifically mentioned AI, computing power, and EVs.

This criticism is remarkable. Because competition between provinces is actually a cornerstone of China's economic system.

Xi is signaling a course change. And he's particularly critical of local officials: "They make risky decisions but take no responsibility."

The message? Uncontrolled expansion of the EV industry is over.

China's State Council announced plans to stop "irrational competition." Consolidation is inevitable. Of the 120 EV brands, probably only 10 will survive.

Export Becomes the Solution

This creates a new dilemma for China. The production capacity exists. What to do with the overproduction?

The simple solution: Export.

Today, 20% of all vehicles produced in China get exported. That's up 11% from last year.

The value of Chinese auto exports has nearly tripled in 3 years.

Here's what's particularly interesting: China sells its cars abroad at much higher prices. Export prices match established manufacturers. That's often double the domestic Chinese price.

Experts expect Chinese automakers to control about 30% of the global market by 2030.

The Global Response to China's Export Push

This export strategy faces resistance. Many countries fear that cheap Chinese cars will flood their domestic markets.

EU President Ursula von der Leyen puts it this way: "China is flooding global markets with subsidized overcapacity to stifle international competition."

The EU introduced tariffs on Chinese EVs in fall 2024. The US has almost completely shut off its market.

This creates a new challenge for China: How do you keep global markets open for desperately needed exports?

Technology Control as Bargaining Chip

Here's where the second part of the puzzle comes in. Last week, China placed 8 battery technologies under export control.

Any technology transfer abroad now requires a license from the Chinese government.

This measure directly responds to trade tensions. China is using strategic dependencies as bargaining chips. We've seen this before with rare earth materials.

The timing is no coincidence. The EU has been negotiating with China for months about handling Chinese EVs. A central point: Technology transfer from China to Europe. Especially for batteries.

With these new export restrictions, China creates a bargaining chip. The message: Want our technology? Then open your markets.

My Take

What does this mean for Europe, Germany, and traditional automakers?

Here's how it all connects:

1. China's real estate crisis led to massive overcapacity in the auto industry. This overproduction caused the price war

2. China uses exports to get rid of excess production. It's exporting its problems in the form of cheap EVs to all open markets. Including Europe

3. Meanwhile, consolidation has begun in China. The surviving manufacturers will be even stronger. With greater economies of scale. Better technology. Even more market power

4. China uses strategic dependencies as negotiating instruments. This hits Europe twice. We're both: a target market for China's overproduction and highly dependent on China

The result of this week's EU-China summit in Beijing? China sees no reason to compromise.

The interests are obvious:

• Europe wants access to Chinese know-how. And doesn't want to be flooded with subsidized cars

• China wants free access to European markets to get rid of its excess production

I'm curious to see what deal emerges.

But one thing is clear: When bubbles burst in China, European jobs disappear. What happens in China affects all of us.

PS: As always, I discuss this topic in more detail in the accompanying podcast.

🔗 bl1 | bl2 | bl3 | cn1 | cn2 | ec1 | fa1 | ft1 | ft2 | ft3 | ha1 | ny1 | re1 | re2 | ta1 | ws1 | yo1

That's all for today.

Feel free to reply to this email with your thoughts.

Until next week,
— Philipp

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