China's supply overcapacity is not a new issue. Since the rapid growth of the Chinese economy in the 2000s, overcapacity in traditional industries such as steel, cement, coal, and petrochemicals has been identified as a problem that needs to be addressed. In 2013, the Chinese State Council identified steel, cement, flat glass, and shipbuilding as key industries suffering from overcapacity. The government pointed to blind investments by companies, competition among local governments for growth, redundant construction, and reliance on investment as factors exacerbating the issue. Consequently, it initiated supply-side reforms aimed at reducing production capacity, particularly in steel and coal. However, more than a decade later, the debate over overcapacity has shifted to electric vehicles, batteries, and solar energy. The problems that emerged in industries that once drove China's growth are now reappearing in sectors that the country has nurtured as future growth engines.
However, it is not entirely accurate to view the current overcapacity in the same light as past issues in steel or coal. This is because the industries being criticized for severe overcapacity coincide with those in which China is rapidly enhancing its global competitiveness. According to the International Energy Agency (IEA), by 2024, approximately 85% of the world's battery cell production capacity will be concentrated in China, and by 2025, Chinese companies are expected to account for about 75% of the global electric vehicle battery market. Additionally, around 75% of the world's electric vehicle production is taking place in China, with exports nearly doubling from the previous year to over 2.5 million units. The very industries that are said to be producing too much are also where Chinese companies are gaining dominance in the global market. So, should China's overcapacity be viewed merely as a failure of industrial policy?
Of course, producing more does not automatically lead to competitiveness. The growth of China's electric vehicle and battery industries is the result of a massive domestic market, supportive industrial policies, a supply chain that connects raw materials to components and finished products, and sustained investment in research and development. Additionally, China's unique competitive structure plays a role. When the central government identifies strategic industries, local governments pursue investment and business attraction, prompting companies to increase production capacity to capture market share. This alignment of local governments seeking investment and companies aiming to boost market share has led to repeated instances where investment outpaces actual demand.
When increased production capacity cannot be absorbed by the market, the situation becomes complicated. Companies that have invested heavily in production facilities find it difficult to reduce output immediately when demand decreases. Cutting production increases fixed costs and risks losing market share to competitors. As a result, companies may lower prices to maintain market presence, leading to a cycle of destructive competition where even increased sales do not translate into profits. The term 'neijuan' (内卷), often used in China, aptly describes this situation.
Recently, the Chinese government has begun to emphasize 'fan neijuan' (反内卷), which aims to curb excessive low-price competition and chaotic expansion of production capacity, reducing bloodletting competition among companies. In the second quarter of this year, the operating rate of China's manufacturing production facilities was only 73%, with the automotive sector even lower at 70.8%. While operating rates alone cannot definitively indicate overcapacity, the government's emphasis on fan neijuan suggests a recognition that the current competitive landscape cannot remain unchanged. It remains to be seen whether fan neijuan will merely restore price order or lead to adjustments in production capacity and corporate restructuring.
Interestingly, while China emphasizes fan neijuan domestically, it strongly rebuffs claims of overcapacity raised internationally. In July, the Chinese Ministry of Commerce released a statement addressing the so-called 'overcapacity issue,' countering assertions made by the U.S. and Europe. The argument is that global production capacity is a result of international industrial division of labor, and one should not judge overcapacity solely based on production capacity or export volume. At first glance, this may seem contradictory, but from China's perspective, it is not. What China wants to reduce domestically is excessive competition among companies, not the hard-won industrial competitiveness.
It is unlikely that the Chinese government intended to create overcapacity from the outset. Over-investment, redundant investment, and cutthroat competition among companies are indeed challenges that the Chinese economy must address. However, it cannot be deemed a failure to have already established production capacity, supply chains, technology, and price competitiveness. The key question is how to manage these going forward. If fan neijuan can reduce excessive competition and overcapacity while preserving competitive companies and industrial ecosystems, the outcome could be significantly different from the present.
Thus, my focus is not solely on the overcapacity itself but on what follows. If fan neijuan goes beyond merely curbing price competition and leads to the restructuring of overcapacity and marginal companies, it could result in a sorting process within China's manufacturing sector. Not all companies can be sustained indefinitely, nor is there a reason to dismantle a hard-won industrial ecosystem.
From South Korea's perspective, the timing of these developments is crucial. A more concerning scenario for us would be if China successfully addresses its overcapacity. While overcapacity and marginal companies may decrease, if production and markets concentrate around competitive firms, China's manufacturing competitiveness could strengthen. Having already experienced the impact of China's capacity expansion on prices and profitability in steel and petrochemicals, we must also consider the competition surrounding technology and supply chains in electric vehicles, batteries, and solar energy.
Ultimately, our perspective on China's overcapacity needs to change. Merely pointing out the issues of over-investment and cutthroat competition in the Chinese economy may cause us to miss the changes that will follow. What we should closely examine is not how severe China's overcapacity is, but who will survive after it is addressed. Perhaps the moment our industry needs to be most vigilant is not during the current overcapacity but after China has resolved its overcapacity.
Author's Major Background
△ Ph.D. from Renmin University of China △ Postdoctoral researcher at Jeju Peace Institute △ Secretary-General of the Korea-China Social Science Association △ Editor of the China Regional Studies Editorial Committee △ CEO of Hans Global Town Co., Ltd. △ Associate Professor of Chinese Economy and Trade at Hannam University
* This article has been translated by AI.
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