The brutal fight to dominate Chinese carmaking

During germany's big motor show in Munich, which ended on September 14th, the city's historic centre belonged to the country's own champions.

- The Economist

In front of the neoclassical opera house, BMW showed off the new iX3, an electric SUV, atop a glittering plinth; at the Residenz, a renaissance palace, Mercedes-Benz built a vast design studio resembling a car grille to display a revamped GLC, another SUV. But at the main exhibition halls in the suburbs, history was forgotten. There, young Chinese car firms outnumbered and outdid the local old guard.

BYD, Xpeng, Changan and Dongfeng showed electric vehicles (evs) with advanced technology and prices that undercut Western models, or announced expansions making it clear that Europe is the main target in their worldwide export blitz. Yet Chinese ebullience in Europe contrasts sharply with troubles at home, where a long-running price war, caused by chronic overcapacity, is raging.

Its origins lie in the Chinese government's success in first nurturing its carmakers and then propelling them to the fore of the global industry. The government realised 15 years ago that its companies could not compete with foreign petrol power, but that an EV industry might thrive in a fast-growing home market if primed with enough subsidies and other support. The result was a surge of investment, dozens of new firms and a market where evs are likely to make up 60% of sales this year.

Around 130 domestic firms now battle for sales, though few make cars in significant numbers. If their factories ran at full tilt for a year they could churn out twice as many cars as there are buyers. The consequence of overcapacity has been a savage price war. The average car price has fallen by 19% over the past two years, to around 165,000 yuan ($23,000), calculates Nomura, a Japanese bank. Some models have seen one-off cuts of around 35%. Although sales are still growing-at a forecast 7% this year, to around 24m vehicles-firms' profits have dwindled or losses mounted.