China’s Auto Overcapacity Demands a Response, Experts Tell Select Committee

“It’s really a process of degrading this ecosystem and once we lose the core components getting this back will take decades,” said one witness.

Overcapacity in the Chinese auto industry is a threat to automakers in the United States and worldwide and will require a concerted and multinational effort to check it.

That was the message panelists delivered at a recent hearing of the U.S. House of Representatives’ Select Committee on the Chinese Communist Party (CCP), which is tasked with examining the economic and national security aspects of the U.S.-China relationship. Heavy and reliable subsidies have pushed China’s automobile production capacity far past demand in its own market; the rest is exported effectively at a discount. And the cars that China’s automakers are turning out are of a very good quality.

“Every year, our team attends the auto show in China alongside most global companies in the industry. Only a few years ago, many Chinese companies were producing decent copies of American and European automotive designs,” said Peter Ludwig, co-founder of Applied Intuition. “Today, however, the Chinese automakers are producing original vehicles with similar quality to the best Western cars, and highly intelligent vehicles are sold for as little as $10,000, a third of the cost of American models.

“China’s rapid progress is a result of long-term and coordinated industrial policy, state subsidies, supply chain dominance, and investments in STEM talent,” Ludwig continued. “The result is an intensely competitive Chinese domestic market with more than 100 manufacturers all racing to out innovate one another. Beijing’s industrial policy promotes flooding foreign markets with these low-cost network vehicles. And this is creating a global physical [artificial intelligence] footprint that is reminiscent of Huawei’s proliferation of networking technologies.”

Ludwig was referring to the security risks inherent in the adoption of Chinese-made smart technology like connected vehicles that could serve as listening devices and vectors for malware. The Alliance for American Manufacturing (AAM) has applauded previous steps to bar connected vehicle hardware and software produced in China from use in the U.S. And we’ve warned about what a flood of heavily subsidized Chinese vehicles for the millions of American jobs supported by automotive production and the ecosystem of parts suppliers it sits atop. We called it a potentially extinction-level event for a bedrock manufacturing industry in a 2024 report.

The panelists largely agreed. If Washington fails to the respond to the effects of Chinese overcapacity on the global auto industry, asked committee chair Rep. John Moolenaar (R-Mich.), where will our own automakers be in 10 years?

Responded Elaine Dezenski of the Foundation for Defense of Democracies:

“It’s not just about the automotive supply chains (that are risked), it’s about all the adjacent industries that use the same supply chains. We might not see direct competition if our tariffs are held up and our import restrictions are held, (but) our companies will continue to weaken and that will make them vulnerable, including to fire sale and the potential acquisition from foreign entities, which could include Chinese entities or others. It’s really a process of degrading this ecosystem and once we lose the core components getting this back will take decades. So there really is an urgent need to think about this as an existential threat, but not only for the automotive industry but all the other industries that are tied in.”

You can watch the entire hearing on YouTube.