China is calling on its electric vehicle industry to stop slashing prices and control production as concerns grow that prolonged deflation could harm economic growth.
In recent months, Chinese officials have repeatedly warned against “involution” in sectors like EVs—where companies pour more resources into competition but see shrinking returns due to overcapacity. President Xi Jinping has directly addressed the issue, criticizing local governments for blindly overinvesting in strategic industries like artificial intelligence, computing power, and new energy vehicles, which risk overheating.
On July 23, Xi emphasized the need to break the cycle of “involution” plaguing parts of China’s economy, the world’s second-largest.
Last month, regulators summoned major automakers, including BYD—China’s answer to Tesla—to warn them about overcapacity. Beijing and Shanghai-based advisory firm Hutong Research noted that government agencies have swiftly responded to Xi’s remarks, pledging supply-side cuts. These moves highlight both the political urgency around excess capacity and how widespread the issue has become.
In China’s fiercely competitive market, consumers have grown accustomed to rock-bottom prices, forcing companies across industries to slash prices—sometimes below cost—to gain market share. EV makers are no exception.
BYD has repeatedly cut prices on its budget Seagull model, now selling for 55,800 yuan (£5,862), nearly 20% below the official retail price. Competitor Great Wall Motors also reduced the price of its Ora 3 by about 20% in June. XPeng Motors CEO He Xiaopeng warned earlier this year that the price war would intensify, predicting some automakers wouldn’t survive.
Last month, China proposed amendments to its pricing law—the first update since 1998—to curb price wars. The changes would strengthen government oversight, define “unfair pricing,” and prevent “involution-style” competition, such as using market dominance to manipulate prices.
However, some analysts doubt these measures will be effective. Antonia Hmaidi of Merics noted that few EV firms in China are profitable, and many are deeply tied to local governments, making it unlikely that Beijing will take strong action against overinvestment.Local governments that don’t want to see these companies fail are taking some steps that suggest they might intervene. However, similar actions in the past haven’t led to meaningful changes. Ultimately, governments would need to offer alternatives to support these local economies.
Hmaidi suggested that China could try to solve its oversupply problem by exporting even more goods, which would likely upset foreign businesses and regulators. “In the short term, this will probably increase tensions with most of China’s trading partners,” she added.
The surge of Chinese electric vehicles entering the European Union has raised concerns among EU officials, who fear their domestic automakers can’t compete. Last year, the EU responded by imposing tariffs as high as 45% on Chinese-made electric vehicles, which angered China. Recent talks between the EU and China failed to resolve this ongoing trade dispute.
Chinese automakers adjusted their strategy by focusing more on plug-in hybrid vehicles. By June, Chinese companies had regained their pre-tariff market position, capturing 10% of Europe’s EV market.
Last week, China’s top political leadership met to discuss economic plans for the coming year. While they didn’t directly mention the anti-involution campaign, they emphasized the need to “control unfair competition” in the economy.
Additional research by Jason Tzu Kuan Lu.
