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China’s car glut went global. Now comes the reset

By Sohail Khan 17 September 2026, 12:08 pm

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Business News›News›International›Business›China's car glut has long flooded the world. Now comes the cleanup

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China's car glut has long flooded the world. Now comes the cleanup
Synopsis

China's auto industry faces a major reset as production exceeds domestic demand significantly. Toyota's planned joint venture consolidation with Chinese partners is an early indicator. Excess production is pushing Chinese automakers to export aggressively, causing global trade responses. Analysts predict a broad industry restructuring over the next two to three years. This consolidation aims to improve efficiency and address the challenges of overcapacity.

China’s auto industry may be heading for a major shake-up after years of building far more production capacity than its domestic market can absorb — and Toyota’s planned revamp with its Chinese partners could be an early sign of what that reset looks like.

The trigger is a proposed tie-up between Guangzhou Automobile Group (GAC) and FAW Group, two Chinese state-owned automakers that operate separate joint ventures with Toyota.

Also Read: China car sales slump for ninth straight month, exports stay strong

GAC said on Monday that it planned to acquire part of FAW’s stake in an unnamed vehicle-manufacturing joint venture. Chinese state media identified the venture as FAW Toyota. The deal could bring Toyota’s two China operations closer together after decades of being run through separate partnerships with FAW in northern China and GAC in the south, Reuters reported earlier this week.

The significance goes beyond Toyota.

The potential consolidation comes as China’s auto industry grapples with vast overcapacity, more than 100 competing car brands and a brutal price war that has squeezed profits. S&P Global Ratings, cited by Reuters, expects a broader wave of restructuring across the industry over the next two to three years.

China built more cars than its buyers could absorb

China’s auto industry expanded rapidly for years, with manufacturers adding factories and capacity as the country pushed into electric vehicles.

The scale of that expansion has now created a mismatch between what factories can produce and what Chinese consumers are buying.

China has enough production capacity to make more than 55 million vehicles a year, according to data compiled by Gasgoo Automotive Research Institute and cited by Bloomberg on September 16.

The country's local sales were less than half that figure last year, according to the China Passenger Car Association.

That imbalance has had a direct impact on manufacturers. Bloomberg reported that industry profits fell 20% in the first half of the year, while Reuters cited official data showing profit margins in vehicle manufacturing had fallen to 1.5%, the lowest in nearly a decade.

With too many manufacturers chasing too few buyers, price cuts have become a key tool for defending market share.

The excess production has also increasingly moved beyond China's borders.

When China’s car glut went global

China’s domestic auto slowdown has pushed manufacturers to look overseas for buyers.

Passenger vehicle sales in China fell 23.4% year-on-year in June to 1.62 million units, marking a ninth consecutive monthly decline, while exports surged 82.1% to 882,000 vehicles, according to China Passenger Car Association data cited by Reuters.

Also Read: China's car slump has a new escape route — the rest of the world

In the first half of the year, domestic sales fell 20.4% to 8.8 million vehicles, while exports jumped 70.6% to 4.28 million.

That has turned China’s production surplus into a much bigger global issue. Chinese automakers have expanded aggressively across Europe, Southeast Asia, Latin America and the Middle East, using lower manufacturing costs, integrated battery supply chains and aggressive pricing to gain market share.

BYD, for instance, saw its exports nearly double in June to more than 175,000 vehicles even as its domestic sales fell 22%, a Reuters report showed.

The export surge has also brought a trade response. The European Union imposed additional tariffs on Chinese electric vehicles in October 2024 after concluding that they benefited from unfair state subsidies, while other countries have stepped up scrutiny of Chinese vehicle imports.

Why Toyota is at the centre of the shake-up

Toyota’s China business shows why the old model is coming under pressure.

For decades, Toyota used two separate partnerships — FAW Toyota in the north and GAC Toyota in the south — to build scale in a rapidly expanding market.

But that model has become harder to justify as China's growth slows and local automakers gain ground with electric and hybrid vehicles.

Reuters reported that Toyota’s two China joint ventures accounted for 7% of passenger vehicle sales in the first eight months of the year, ranking behind BYD, Geely Auto and Volkswagen. In 2021, the two ventures together ranked second, behind Volkswagen.

Toyota has also been shrinking its dealer network. FAW Toyota’s network has fallen more than 15% to 651 stores this year from a peak of 773 in 2022, while GAC Toyota’s network has dropped more than 10% to 620 from 693, according to data cited by Reuters.

GAC-FAW transaction could provide a different route to tackling China’s overcapacity problem.

Rather than trying to merge rival state-owned automakers directly — an approach that has run into employment concerns and regional protectionism in the past — the proposed structure could consolidate foreign-brand joint ventures first.

That matters because both GAC and FAW would remain independent while overlapping production and operations could potentially be reduced. Claire Yuan, a Hong Kong-based credit analyst at S&P Global Ratings, told Bloomberg that the transaction could serve as a test case for deeper integration among state-owned enterprises.

The bigger problem is not just too many factories

The Toyota restructuring may help reduce duplication, but analysts cited by Reuters say efficiency alone will not solve the problems facing foreign automakers.

Bill Russo, founder of Shanghai-based consultancy Automobility, said the proposed move had sound industrial logic because Toyota could make its sales and distribution more efficient and reduce overlapping investment. But he said the bigger challenge was the loss of relevance of global automakers in consumer-facing technology.

Chinese brands such as BYD, Geely and Chery have gained market share with rapidly developed electric and hybrid vehicles and are now expanding overseas.

That has put the traditional foreign joint-venture model under pressure. Jia Ke, founder of consultancy Auto Business Review, said shrinking industry profits were making redundant investment and internal inefficiencies increasingly difficult to sustain, Reuters reported.

The Chinese government has repeatedly warned about overcapacity and damaging price wars. Last week, its top economic planner reiterated support for mergers and restructuring among major automakers.

(With inputs from Agencies)

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