The following summarises a Bloomberg Opinion column by Liam Denning, a former banker who edited the Wall Street Journal’s Heard on the Street and wrote the FT’s Lex column. It reflects the author’s personal views.
- Global automakers will sell about 85 million new passenger vehicles this year against capacity of 142 million, according to BloombergNEF. That is 57 million units of excess, and global utilisation of 60% sits far below the 80% threshold industry analyst Glenn Mercer identifies as the level needed to cover costs.
- The economics follow from that. The world’s automakers managed an aggregate operating margin of 3.6% last year, and 63 listed manufacturers with market values above $1 billion produced $106 billion of adjusted earnings before interest and tax combined, against $141 billion for Apple alone.
- Electrification is making the problem worse rather than resolving it. Dedicated internal combustion capacity is projected to fall by about 5 million units by 2030, while more than 10 million units of mixed and EV-only capacity is expected to open over the same period, a net addition of roughly 5 million into a system already 57 million oversupplied.
- China holds a quarter of global vehicle sales and more than a third of manufacturing capacity, with enough plant to build more than two cars for every one sold domestically. Exports are what keep utilisation at 60% rather than below 50%.
What Happened?
Denning argues the root cause is political rather than commercial: closing a car plant is a societal event as much as an economic decision, so the decision gets deferred, and plants serve as symbols of industrial vitality and reserves of capability underpinning national security. Roughly 28 million units of new capacity were added over the past decade, four-fifths of it in China, while sales rose by only 5 million. The US has effectively closed itself to Chinese models and turned against its North American trade partners, with Mexico exposed. Europe has moved to quotas after tariffs failed to stem imports, and Volkswagen is ending production at several German plants. Denning proposes accommodating Chinese competition through mandatory joint venture plants in the US that repurpose existing capacity rather than building new, citing Ford’s arrangement with Geely at an underused factory in Spain, and argues Chinese makers’ need to diversify gives Washington leverage. Readers should weigh that against the technology transfer and national security objections such arrangements attract.
Why It Matters?
The net capacity arithmetic is the detail the column supplies without quite stating, and it is the most important number here. Subtracting 5 million units of combustion capacity while adding more than 10 million of mixed and electric capacity leaves the industry with about 5 million units more capacity in 2030 than today, in a market already able to build 57 million more cars than it sells. The transition to electric vehicles is not rationalising the industry, it is expanding it, because new drivetrains require new lines while the old ones close on political rather than commercial timetables. Anyone expecting electrification to fix auto margins has the direction wrong. The Apple comparison explains more about the companies in this sector than any firm-specific analysis. An entire global industry of 63 listed manufacturers earning less than one consumer electronics company is the context for Stellantis falling 60% while defending fourteen brands, for Ford trading far below analyst targets, and for the pressure on European makers generally. At 3.6% margins there is no room for strategic error, and the sector’s problems are structural rather than managerial. The Chinese export surge reads differently once utilisation is understood. Pushing vehicles overseas is not primarily a strategy for market share, it is what keeps plants above the level where losses become catastrophic. That is why tariffs and quotas have limited effect: a manufacturer running below 50% utilisation loses money whether or not it can sell abroad, so the incentive to export persists through almost any trade barrier. Denning’s proposal addresses that by targeting the capacity itself rather than the flow, which is analytically coherent whatever one concludes about its politics.
What Next?
Watch whether capacity actually closes, with Volkswagen’s German plant closures the test of whether the political constraint is weakening in Europe. The US position on North American trade determines Mexico’s exposure, and Ford’s chief executive has put the chance of a three-country USMCA update at 50-50. In China, whether authorities move to rationalise domestic capacity is the variable that would change the global picture most. For investors, utilisation rates rather than sales volumes are the metric that determines whether this industry can earn an adequate return, and at 60% globally it currently cannot.
Affected Tickers and Coins: GM, F, RIVN, 175, AAPL
Source: Bloomberg Opinion
