China's auto industry may be facing a capacity problem, but the pressure appears to be concentrated in gasoline-powered vehicles rather than electric cars. Conventional vehicles represented 99% of China's auto sales in 2016, but that share fell to 36% in May as consumers shifted toward battery-electric and plug-in hybrid models. Chinese buyers purchased nearly 17 million electric and plug-in hybrid vehicles last year, while dedicated EV production lines are capable of producing roughly 15 million units annually. When mixed-use factories that can build both conventional and electric vehicles are included, China's EV production capacity may reach about 25 million vehicles per year. With domestic EV sales expected to total between 17 million and 20 million this year, utilization could remain at a normal 70% to 80% level even without exports.

Demand appears especially strong for Xiaomi, a Chinese technology company producing electric vehicles, and EV manufacturers Nio NYSE:NIO, Li Auto NASDAQ:LI and Xpeng NYSE:XPEV, which appear to be selling more vehicles than their factories were originally designed to produce. The heavier excess capacity is instead concentrated among state-owned automakers and foreign joint ventures that remain more exposed to internal-combustion vehicles. SAIC Motor, a Shanghai government-owned automaker operating major joint ventures with global carmakers, reported a 95% utilization rate at its Wuling venture with General Motors NYSE:GM, a US automaker whose partnership now produces mostly electric vehicles. By comparison, SAIC's other ventures with General Motors and Volkswagen, a German automaker, recorded utilization rates of just 37% and 55%. Volkswagen's electric vehicles represented only 3.6% of its China sales last year, compared with 19% in Europe, while gasoline-model sales from JAC Group, Dongfeng Motor Group, BAIC Motor and Haima Automobile have fallen by at least two-thirds from their peaks around 2016.

For investors, the figures suggest China's auto disruption may be driven more by changing consumer demand and the replacement of gasoline vehicles than by excessive electric-vehicle production. Nissan Motor, a Japanese automaker, had the capacity to produce 1.7 million vehicles in China in 2023 but sold barely one-third of that amount, and the company has since closed plants and written down investments. Nissan still appears to retain significant underused capacity that could potentially be repurposed to export lower-cost electric vehicles to the Americas. The widening gap between heavily used EV factories and underutilized gasoline-car plants may create additional restructuring costs for established automakers while supporting further expansion by faster-growing EV specialists. Investors may therefore view legacy manufacturing assets as the more immediate risk, particularly when automakers continue holding factories designed for products that Chinese consumers are buying less frequently.