As geopolitics increase with the progress of a global energy transition, so does the debate on protectionism, globalisation and supply chain capacities. China dominates the manufacturing capacity of products such as electric vehicles, lithium-ion batteries, and solar panels, and this has raised eyebrows across the globe.

In a recent report, Deloitte economist Michael Wolf discusses China’s overcapacity and how it could potentially lead to shrinking its global market share.

“Excess capacity itself has contributed to deflationary pressure in China as excess supply pushes prices lower,” he explains. “This in turn can lead to a vicious cycle of lower wages, lower consumer spending, and even lower prices. China’s excess capacity therefore risks an ability to overcome global pushback on its export sector.”

Wolf believes that the Chinese market share for products such as EVs, batteries and solar panels is threatened by excess supply and small profit margins. With poor economics, production volumes are set to decline, while countries around the world push to reduce their reliance on Chinese supply. Yet, the Asian nation is still expected to hold the biggest share of supply in such technologies.

Given China’s increasing trade surplus in the auto sector, Wolf claims that theoretically, countries that are net importers of vehicles could benefit the most from relatively inexpensive Chinese cars. Meanwhile, large auto-exporting countries, such as Germany, are likely to struggle with tough competition from Chinese automakers.

The US, Australia, France, UK, and Switzerland are considered major auto net importers. Wolf points out that the high tariffs being imposed on electric vehicles made in China are prohibiting US and France consumers from benefiting from access to low-cost Chinese EVs. Smaller economies, with a high share of auto imports, such as Lebanon, Georgia, Iceland, and Montenegro, are set to benefit the most. 

China’s surging exports in auto parts are disrupting large auto parts exporters, such as Japan, Germany, South Korea, Mexico, and Poland, while benefitting net importers of auto parts, such as US, Slovakia, the UK, Spain, Brazil, and Canada. Benefits in the US are undermined by Washington’s trade policies against Chinese exports, Wolf notes.

In the trade of lithium-ion batteries, the economist projects that net exporters such as Poland, Hungary, South Korea, and Japan are likely to be in disadvantage positions as China continues to ramp up production capacity with lower prices. The US’ upside is limited in the near term due to its trade protectionism, but could be boosted in the longer term if domestic capacity increases.  

“Because China is already such a dominant player in batteries and other countries have implemented policies to boost their domestic capacity, China is expected to lose some of its market share by 2030,” he adds. “Even so, China is expected to see its capacity increase over this period, just not as quickly as it will happen in other countries.”

Yet, Deloitte highlights Beijing still faces risks related to the supply of critical minerals used in batteries. The company also notes that in the short term, producers of raw materials, such as aluminium, copper and platinum group metals, will play increasingly important roles in auto body and parts production. They will likely benefit from China’s rapid auto production ramp-up but may be at risk in the long term when there is eventually a correction in the market as overcapacity accumulates. 

However, in China, experts are questioning Western views and whether the use of the term overcapacity is appropriate. He Yadong, deputy director of the policy research department and spokesperson at China’s Ministry of Commerce said during a press conference this year that some Western commentaries are double standard.

“When talking about tackling climate change, they believe that new energy production capacity is still insufficient; when talking about China’s new energy industry, they accuse it of overcapacity,” He said. “Such remarks have only one purpose, which is to strike at China’s new economic growth engine and include industries that affect Western interests, such as photovoltaic products, new energy vehicles, and lithium batteries, within the ‘small courtyard and high wall’ built against China, thereby protecting their own industries.”

“In today’s globalised world, the development of an industry is no longer just a matter for one country but involves complex international relations and market rules,” comments industry expert Lai Yin. “The difficulties encountered by Chinese EV companies in the process of going overseas are, to some extent, challenges that China’s manufacturing industry must face in the process of overall transformation and upgrading.”

Chen Yuyu, professor at Guanghua School of Management at Peking University and director at China Centre for Economic Research, believes that there is a degree of misunderstanding towards production capacity excess. 

“A large part of the supply-demand imbalance that is referred to as overcapacity is not actually due to oversupply, but rather weak demand in the economic cycle and insufficient total demand,” he explains. “The imbalance between supply and demand due to advanced construction of new technologies and new industries cannot be considered as overcapacity.”

CHINA’S TRADE CHANGE BETWEEN 2019 AND 2023

SOURCE: DELOITTE

Chen claims that the accusations of overcapacity and subsidy dumping now advocated by the US and Europe are groundless. “They are just excuses and pretexts for launching trade disputes and implementing trade protectionist measures based on their own national interests,” he states, suggesting China should facilitate further negotiations with Europe and the US on trade issues “as soon as possible.”

At the same time, Chen says the Chinese government should also “promote the adjustment, transformation and upgrading of China’s industrial structure and sustainable development, and support Chinese companies to go overseas.”

According to China’s International Cooperation Centre (ICC), a new round of technological revolution and industrial transformation is developing in-depth, profoundly affecting manufacturing patterns and society’s lifestyle across the world. 

“Unlike the background era of previous scientific and technological revolutions, countries in the world today are highly interdependent,” the ICC notes, stressing the importance of global trade. “Although economic globalisation has encountered headwinds in recent years, the scale of cross-border flows of goods, services, capital, and personnel is far greater than in previous eras.”

Whether the debate on overcapacity will settle or intensify in the coming years remains to be seen. What remains clear is that electric vehicles are key for the energy transition and the global good.