I know it sounds crazy, but China’s car market pretty much stopped growing a decade ago. It sounds crazy because all the news coming out of China is about the amazing surge in New Energy Vehicle (NEV) sales, the explosive growth in exports and how BYD, the biggest car company in China, moved past Nissan, Honda and Ford in global sales last year.
In fact, if BYD stays on its current growth path, it could surpass General Motors toward the end of this year. And it may be only a matter of time before BYD becomes the largest car company in the world.
And yet, the Chinese auto industry is starting to face some significant headwinds. For one thing, a lot of countries are uncomfortable with all those Chinese cars pouring into their markets. The U.S. has already effectively blocked the Chinese automakers with tariffs and with bans on connected-car software and hardware from China. The European Union significantly raised its tariffs on Chinese EVs. Last year Mexico raised its tariffs on imported cars to 20%. Brazil is raising tariffs on electric imports, which will top out at 35% next year. And they’re doing that because of all the Chinese imports flooding into their markets. In fact, the Rhodium Group, a research company, says China’s vehicle exports have peaked and are not going to grow much.
Also, the rate of growth in sales of NEVs in China has slowed significantly. The Rhodium Group points out they shot up 23% in 2022, 44% in 2023 but only 8% last year.
That could be a real problem for Chinese automakers. So far, only two car companies making NEVs are profitable, BYD and Li Auto. If sales are starting to plateau, that’s going to make it very difficult for others to become profitable.
Maybe this is why two of China’s giant car companies announced they want to merge. Both Changan and Dongfeng announced plans in early February to merge. They didn’t explicitly say they were going to merge with each other, but that seems to be what will happen. If they do, they’d become the largest car company in China, even bigger than BYD. But they’d only want to do this if they saw trouble on the horizon.
And here’s what I think they see: China’s home market for passenger cars really isn’t growing anymore. In 2024 Chinese consumers bought 1 million fewer cars than they did in 2016. In fact, over the past decade, according to numbers from the China Passenger Car Assn., sales of new cars have gone up and down, but overall, they’ve averaged about 22 million a year. Last year it was 22.8 million, or just barely above trend. This does not include commercial vehicles or exports, only passenger vehicles that were retailed to customers.
So, what’s going on here? How come China’s home market has stalled out? How come car sales have been bouncing around 22 million a year for the past decade?
I see several things going on:
First, China’s economy isn’t growing as fast as it used to.
Second, the real estate bubble burst and millions of Chinese households are upside down on the apartments they bought, or several years ago put deposits on apartments that still have not been built. And now they’re gun-shy about buying big-ticket items like cars, or they don’t even have the money to buy one.
Third, maybe China has hit the saturation point of people who are going to buy cars. With superb public transportation, it’s possible a lot of people figure they just don’t need the hassle of owning an automobile.
BYD profitable, but sales starting to level off.
BYD profitable, but sales starting to level off.
And then there’s the fourth reason – population decline. China’s population peaked in 2020 at 1.426 billion people, and then it started to fall. In 2022 India surpassed China in population. According to Worldometer, which bases its calculations on data from the United Nations, China’s population will fall to 1.416 billion by the end of this year. That’s 10 million fewer people than just 5 years ago. And it’s 3.2 million fewer than just last year.
So, you can see the rate of decline is accelerating. I don’t know if it’s had that much of an impact on car sales yet, but it’s definitely going to have a huge impact in the years to come.
This is why China is so keen to export as many vehicles as it can; its home market has pretty much stopped growing. There’s a price war raging that makes it almost impossible to make profits making NEVs. Worse, China has a massive amount of overcapacity and it’s been counting on exports to be a safety valve that pushes that capacity into other markets. But exports have slowed significantly.
Peak Auto isn’t just a problem in China. All the other major markets in the world like the U.S., Europe, Japan and South Korea have seen car sales stall out or start to fall. It’s a global trend.
And who knows? Maybe China could still turn things around. It has one of the lowest rates of cars per capita of any country in the world, so there could be plenty of upside if it can get more people to buy cars.
But right now, none of the numbers show that happening. And despite all the media attention on booming exports, soaring NEV sales and BYD growing faster than any other major car company, I think most people will be stunned to learn that China’s home car market really isn’t growing.
