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China’s zombie car plant problem

Cars parked at auto plant in Qingdao area of Shandong Free Trade Zone
The collapse of China’s legacy automotive market poses an existential threat to foreign and state-backed carmakers and serious long-term economic and social challenges for the country © CFOTO/Future Publishing/Getty Images

Policymakers from Brussels to Washington are fretting over the security and economic risks posed by a fast-rising wave of Chinese electric vehicle imports. 

But for Xi Jinping’s administration in Beijing the rapid emergence of the nation’s advanced EV industry has created a different dilemma: how to manage the terminal decline of the sector devoted to internal combustion engines?

China’s auto industry is the world’s biggest across sales, production and, since last year, exports. In 2023, a record 30.1mn cars were produced, up from the prior peak of 28.9mn in 2017, according to data from Automobility, a Shanghai consultancy. However, the growth in China’s EV industry, which now accounts for more than 30 per cent of domestic passenger vehicle sales, has masked the staggering decline in sales of non-EVs. Last year, China produced 17.7mn cars with internal combustion engines for the local market, a 37 per cent fall from 28.3mn in 2017. 

The collapse of the legacy car market after decades of growth poses an existential threat to scores of foreign and state-backed carmakers operating in China. But it also presents serious long-term economic and social challenges for the country, according to auto sector analysts, academics and economists.

The leadership in Beijing has publicly acknowledged the risks of excess manufacturing capacity that has been a feature of China’s industrial development over recent decades. According to remarks from Xi released after December’s Central Economic Work Conference, an annual meeting that sets economic policy for the following year, “overcapacity in some industries” was among the key “difficulties and challenges that must be tackled to achieve further economic recovery”.

But a clear plan to address the problem of an industry in terminal decline has not been laid out. Some factories will be able to be repurposed for EVs, some geared towards exports, but scores are already surplus to requirements, raising the spectre of hundreds of zombie factories emerging over the coming decade. 

At a national level, Chinese economic planners must combat a “classic transition problem” of labour reallocation as the world’s second-biggest economy shifts from traditional manufacturing towards new clean-tech industries, said Keyu Jin, an associate professor at the London School of Economics and author of The New China Playbook.

In response, Jin said, government officials have started expanding the quantity and the quality of vocational schools to help match labour skills to jobs. “If anything, the Chinese government will do better than many other governments, including the US, which utterly failed in terms of helping their workers transition away from low-end manufacturing,” she said. 

But a key “barrier” to China’s reallocation of labour resources lies in the country’s hukou household registration system, Jin added. This core institution constrains the migrant population of almost 400mn by denying their families equal access to basic services when they move to new areas in search of jobs.

Despite the growth of the EV industry, the number of people employed in auto manufacturing in China reached close to 5mn in 2018 and has fallen by 500,000 workers since, according to data group CEIC. 

Albert Park, chief economist with the Asian Development Bank, said the bank had forecast that the number of jobs created in new green industries Asia-wide would outpace losses from declining industries linked to fossil fuels. But he said the picture was less clear in China because of problems such as opaque employment data, sluggish economic demand and the property sector downturn. “The adjustment issues are pretty substantial,” he said. 

As more factory closures loom, data from China Labour Bulletin, a Hong Kong NGO, showed that more than 60 protests had been organised by auto workers over the past five years. 

Abbey Heffer, a China labour and governance expert at the University of Tübingen in Germany, said government officials in some localities had experience in dealing with factory closures and sudden, large-scale unemployment. But there remained a risk that labour disputes in the auto sector could “snowball” and draw the attention of the central government in Beijing. “It’s not nice to be a local official right now . . . they’ve got the anger from below and the anger from above: what are they supposed to do?”