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Key Takeaways

• BYD slashed EV prices by up to 34%, triggering a nationwide auto price war in China.
• The fallout is collapsing margins, rising supplier stress, and inflated sales practices.
• Nearly 25% of China’s industrial firms are now unprofitable - highest since 2001.
• Local governments are propping up “zombie firms,” worsening industrial overcapacity.
• Ultra-cheap Chinese goods, including autos, are flooding global markets.
• Countries from India to Russia are responding with tariffs and trade crackdowns.
• China’s auto sector crisis reflects deeper economic instability with global consequences.

A couple of weeks ago, I wrote to you about how China’s auto giant BYD kicked off an aggressive price war - slashing prices by as much as 34% to clear inventory and boost sales.

Put simply, when one automaker cuts prices to gain market share, the others must follow - or lose ground. Company A cuts 10%, Company B cuts 11%, Company C cuts 12%, and so on.

But this isn’t just about discounts - it’s about the ripple effects.

• Suppliers are worried about missed payments from auto giants.
• Beijing officials are worried the price war could spiral into chaos.
• Investors are worried about margins vanishing and accounting gimmicks.
• Foreign firms and governments are worried as prices sink and exports surge.

Still, this isn’t just an auto story.

It’s a symptom of something much deeper.

China’s private industrial base is running dangerously lean. Unprofitable firms now sit at multi-decade highs. And the auto price war is pouring fuel on that fire - with consequences that won’t stay contained within China’s borders.

Let me show you why in this exclusive edition of the Morning Pour.

China’s Auto Price War: The Recipe of Trouble 

China’s car market is flashing red on multiple fronts – such as:

• Overcapacity
• Margins collapsing
• Ballooning inventory
• Creative accounting that raises eyebrows

And while these issues aren’t new, they’ve amplified in the past few weeks.

To give you some context: in late May, BYD slashed prices on 22 models - some by over 30%. Such an aggressive move was designed to undercut rivals and offload excess inventory, but it exposed the deeper strain in China’s overheated EV space as a flood of new entrants and repeated price cuts have gutted margins so badly that Beijing stepped in.

• Chinese officials summoned top auto executives and urged them to “self-regulate” - aka stop selling below cost and don’t drag the entire industry down.

Even BYD’s EVP - Stella Li - called the price war “very extreme” and “not sustainable” – which is ironic as her company literally lit the match¹.

But she’s right. It isn’t sustainable.

Gutting the Bottom Lines

Such steep price cuts - between 15% to 50% - are gutting profits across the board.

• Same costs + lower prices = collapsing margins.

And it’s not just domestic players. To stay in the race, foreign brands like Volkswagen and Mercedes have been forced to follow suit just to compete in China - making it an international issue.

Figure 1: Bloomberg, June 2025

And since BYD’s May 23 price-slashing announcement – its stock is down about ~20% as of writing this.

But it’s not just shareholders that are nervous. Suppliers are anxious too.

Auto Suppliers: Bogged Down by Delayed Payments

After that June meeting with regulators, automakers like BYD and Geely promised to pay suppliers within 60 days - a global norm².

Sounds reasonable, right?

Well, for companies like BYD, this is a big change because historically, their payment cycles stretched well beyond 100 days (sometimes the wait is over half a year).

• In 2023, BYD took an average of 275 days to pay suppliers. That’s not just slow - it’s absurd.

You might ask, “Suppliers wait nearly a year to get paid? How?”

Simple. Debt.

In China’s auto industry, many suppliers are paid with promissory notes instead of cash. BYD’s DiLian platform lets them trade or cash these early - for a fee. And as of May 2023, BYD had issued over 400 billion yuan ($56B) of these IOUs - using them as collateral (the latest data available).

Some suppliers - usually the larger ones - make it work. They borrow against what they’re owed (aka they use the note as collateral).

But in today’s EV price war, delayed payments aren’t harmless. Margins are already thin. Cash is tight. And just one missed note payment can ripple fast - wages go unpaid, inventory stalls, and debt piles up.

And that’s the real risk here. These notes only hold if the automaker pays. If not, it’s not just a delay - it’s a chain reaction.

This system chokes supplier cash flow and magnifies stress across the supply chain.

So, while the 60-day pledge is a step in the right direction, for many, it’s still wait-and-see as competition heats up.

The Debt Nobody Wants to Talk About

Now comes the bigger risk - the one that may be hiding in plain sight.

GMT Research – the very firm that flagged Evergrande early on before it imploded - says BYD’s true net debt could be as high as ¥323 billion ($44 billion) – over 10 times what the company claims³.

• That’s nearly half its market value.

Worse, no one really knows who’s owed, when payments are due, or what the terms are. As GMT puts it, “The nature of these obligations is unclear.”

The point is, BYD - and likely others - may be running on borrowed money and borrowed time. They're pushing for market share while quietly stretching themselves thin.

And if suppliers are already waiting close to a year for payment and they're issuing IOUs left and right, you have to wonder: how close to the edge are they already?

Faking the Numbers With Zero-Mileage Cars

Meanwhile, there’s the growing issue of “zero-mileage cars” – which is another symptom of the auto price war and one that Beijing has directly said needs to stop⁴.

• “What are zero-mileage cars?” These are brand-new vehicles that haven’t been sold to real customers, but still show up as “sold” on paper. Dealers register them to themselves or affiliated entities so automakers can hit sales targets. It’s like moving inventory from one garage to another and calling it a sale - while pocketing a government subsidy.

Here’s how it works: Automakers - eager to hit quotas and make a sale - “sell” cars to friendly dealerships or partner firms. Once registered, the vehicles count toward official sales and receive a government subsidy. But instead of ending up with real buyers, they’re quietly moved to the used car market - usually at steep discounts. Now, it may look like a win-win: automakers boost their numbers, dealers flip inventory, and consumers get cheap EVs. But regulators are catching on – with many now seeing it as subsidy abuse as public funds are claimed for what’s essentially a fake sale.

And as I wrote to you previously, it’s not just a gimmick. It’s inventory laundering – a way that masks weak demand and props up balance sheets.

But such gimmicks distort sales figures, mislead investors, and fuel a vicious feedback loop.

• Fake sales justify real production > oversupply deepens > prices fall further > repeat.

Remember, you can put lipstick on a pig - but it's still a pig.

Symptoms of the Same Disease?

Delayed payments. Aggressive price cuts. Inflated sales. Vanishing margins.

All signs of a troubled sector. But more than that - they’re symptoms of a weakening economy on life support.

Because when margins vanish, unemployment often follows. And Beijing won’t let that happen without a fight.

On Life Support: Unprofitable Firms Explode in China as Beijing Keeps The Lights On

Did you know that by the end of 2024, China had the highest number of loss-making industrial companies since 2001?

• Nearly one in four industrial firms - about 23% - are operating at a loss⁵.

Figure 2: Bloomberg, June 2025

Faced with this, debt-ridden local governments are offering tax breaks and subsidies to keep firms alive and prevent mass layoffs and revenue loss.

But here’s the real problem. . .

Propping up unprofitable firms only worsens China’s overproduction crisis.

• Put simply, Beijing’s stuck between a rock and hard place: let unprofitable firms fail and trigger mass unemployment, or keep them afloat with government money and worsen the supply glut that’s already rattling global markets

Thus, for a party built on the promise of “social stability,” the choice is obvious: subsidize to survive – which means too many goods pile up, prices drop, and companies feel the pain.

• These are infamously known as “zombie firms” – aka businesses that would fail without constant state aid or credit.

And these zombies are growing in number, flooding markets with products few want, dragging down profits across entire sectors.

Just look at the chart below - it shows collapsing manufacturing profits, especially for car producers.

Figure 3: Bloomberg, June 2025

I expect Beijing to continue subsidizing these firms – keeping jobs and growth from falling off a cliff and sparking public unrest (which the Chinese Communist Party is worried about).

But here’s the problem with that. . .

In this hyper-globalized world, domestic policies can directly influence global trade.

So, this isn’t just a story about car prices in the end – but rather it’s about a fragile situation spilling over into global markets. . .

From Beijing to the World: How China’s Auto Crisis Goes Global

“Wait, why does China’s auto-price war and over-subsidized manufacturing affect the world?”

I know I’ve written exhaustively about this before – such as in “China’s Manufacturing Glut” and “BRICS Currency: How It Could Work, Why It Likely Won’t, And How It Will Impact The Dollar” - but here’s the quick gist. . .

China’s economy has been producing far more than its consumers are willing - or able - to buy. This mismatch between weak domestic consumption and excess production creates pressure to offload goods elsewhere (aka find buyers abroad).

Why? Because if they can’t find buyers at home = businesses can’t make money = can’t pay employees = can’t spend themselves = and repeat the cycle.

• It looks like the mainstream economic media is finally catching on to this. As the New York Times⁶ recently did a piece on this, noting: “The flood of exports from China is the consequence of government policy and a slowing domestic economy. To soften the blow of a real estate crisis that reduced the wealth of millions of households, Beijing has for several years been shoveling money into its manufacturing sectors, which are making far more things than there is demand for at home.”

Thus, Chinese companies - especially in sectors like electric vehicles, solar panels, and steel - push their excess into global markets at ultra-low prices – making it their problem.

This then floods international markets, negatively hurting local producers in other countries who can’t compete with the artificially cheap exports.

• For instance, take Canada’s steel industry - it’s reeling from a flood of cheap Chinese imports. Meanwhile, over in Europe, solar panel makers are getting crushed too, unable to compete with rock-bottom prices from China.

Over time, this creates tension and economic imbalances globally.

Countries may see their own industries struggle or lay off workers due to the flood of cheap Chinese goods.

In response to this, governments often impose tariffs or launch trade investigations against China to protect their domestic industries, which can escalate into trade disputes or protectionist policies (which is what we’ve seen as of late)⁷.

Put simply, China’s internal imbalance doesn’t stay confined - it spills over by reshaping supply chains, pricing dynamics, and even the politics of global trade.

No other point shows this like China’s annual trade balance – which hit a record high ~$1 trillion last year – which is synonymous with saying they sold more than $1 trillion than they bought globally).

And while China running a surplus isn’t exactly “new” (they’ve done it for over three decades) - the gap between its exports and imports has more than doubled since 2019, indicating that China’s doubled down on their on their aggressive “Sell more, buy less” strategy.

Figure 4: FT, June 2025

No wonder other economies are stressed (not just the U.S. and Europe).

For example:

• India and Brazil are probing Chinese dumping of metal, chemicals, and tires.
  
  
• Mexico’s president blames cheap Chinese goods for gutting textiles and shoes and will review tariffs against China.
  
  
• Indonesia fears job losses in its textile sector from a flood of low-cost Chinese imports.
  
  
• Even Russia slapped tariffs on Chinese cars after they captured two-thirds of its market.

This is why China’s auto market matters - it’s not isolated.

There are two big reasons for this:

• First, China’s automakers are slashing prices so aggressively that foreign brands like Toyota and Mercedes are losing ground in China - resulting in fewer sales and shrinking market share.
  
  
• Then, that same excess inventory floods global markets, undercutting those brands on their home turf - leading to falling profits, factory closures, and lost jobs around the world.
  

It’s a one-two punch. And this price war is just another bullet in the chamber of the global trade war.

Final Thoughts: Why This Auto Crisis Is Just the Beginning

What we’re seeing isn’t just a price war - it’s a pressure valve for deeper economic stress. Pressure’s been building for years, and now it’s trying to escape. But without a proper release, something’s bound to blow.

China’s automakers aren’t slashing prices from a place of strength. They’re doing it out of desperation to move excess inventory.

And behind the falling sticker prices are delayed payments, inflated sales, overcapacity, and mounting debt. Add in state-backed zombie firms and a bloated industrial sector, and you’ve got a system creaking at the seams.

And because China exports that excess via ultra-cheap goods, the rest of the world feels it.

• This isn’t a localized slowdown. It’s a ripple turning into a global wave.

Most headlines stop at cheap car prices. But if you look beneath the hood, It’s a fragile economy trying to out-export its way out of a slowdown - one bargain at a time.

So, keep your eyes on China’s auto sector. This isn’t over.

As always, just some food for thought.

Sources:

1. BYD Manager Calls EV Price War It Helped Spark Unsustainable - Bloomberg
2. Chinese Auto Parts Suppliers Are Wary of Carmakers’ Bill Payment Pledge - Bloomberg
3. BYD (1211 HK) Supply Chain Financing Masks Ballooning Debt, GMT Says - Bloomberg
4. Chinese State Media Takes Aim at ‘Zero-Mileage’ Used Cars - Bloomberg
5. Xi Keeps China’s Unprofitable Businesses Alive to Save Jobs and Avoid Unrest - Bloomberg
6. China Is Unleashing a New Export Shock on the World - The New York Times
7. Financial Times | China Trade Surplus

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