Reports in Japan lately have suggested that Nissan and Honda are both looking to cut capacity in China in response to declining sales in the country. Global automakers generally have struggled to keep pace with the Chinese market’s rapid transition to battery electric vehicles (BEVs) in the last few years and have lost significant market share as a result.

Established Chinese automakers and high-profile startups all have ramped up their efforts to compete in the country’s fast-growing BEV segment and are offering deep discounts on existing models, while new models coming onto the market are increasingly targeted at lower budget buyers. New domestic BEV brands are also being launched virtually on a monthly basis.

According to data compiled by the China Association of Automobile Manufacturer (CAAM) global sales of China-made vehicles increased by 12% to a record 30.1 million units last year, with passenger vehicle sales rising by 11% to 26.1 million. Total vehicle sales in China, including imports, are estimated to have increased by 6% to 25.2 million units with sales of passenger vehicles rising by around 5% to just over 22 million units. The domestic market has been driven mainly by a sharp rise in new energy vehicles (NEVs), comprising mostly BEVs and including also plug-in hybrids.

Domestic brands have gained significant market share over the last several years. CAAM calculated that they accounted for over 60% of China-made passenger vehicle sales in January, up from around 35% just several years ago. The data also includes exports, which Chinese brands have ramped up significantly in the last two years, but it mostly reflects the growing strength of domestic brands in their home market.

BYD, an early mover in China’s transition to NEVs, reported a 62% rise in global sales to 3.024 million units last year – including a 73% jump in BEV sales to 1.58 million units. Large state-owned automakers such as SAIC Motor, GAC and FAW, reported mixed results  – albeit with their NEV subsidiaries outperforming strongly. Similarly, high-profile EV startups including Nio, Li Auto, Xpeng and Leapmotor also reported strong growth last year.

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Tesla has been strong in China while other foreign OEMs have slumped

Among foreign brands, Tesla stands out as one of the very few strong performers. The US automaker reported a 33% rise in global shipments from its Shanghai plant to 947,742 vehicles, including a 37% increase in sales in China to 603,700 units.

Sales by Nissan’s local joint ventures in China fell by 19% to 780,000 vehicles last year, on a like-for-like basis to reflect the transfer of shares in Dongfeng Automotive Company to its local joint venture partner Dongfeng Motor Corporation (DMC) in late 2022. On a total volume basis its sales were down by 25%.

Nissan still has a 50% stake in Dongfeng Motor Company Ltd, which produces and distributes locally-made Nissan, Infiniti and Venucia branded models. DMC holds the remainder of the shares. The Japanese automaker also has 50% stakes in several separate joint venture plants in the country, located in the provinces of Guangdong, Henan, Hubei, Liaoning and Jiangsu.

Nissan’s joint ventures in China are estimated to have a total annual production capacity of 1.6 million vehicles. Recent unconfirmed reports suggested the company plans to cut this to around 1.1 million units – as demand for conventional ICE vehicles continues to weaken in the country. The company has only confirmed that it plans to continue to optimize production capacity with its local partners, while also revealing new growth targets.

Nissan announced last month that it plans to launch production of eight new NEV models in China by 2026, including four Nissan-branded models, with the aim of increasing sales to 1 million vehicles. It also said it plans to export 100,000 vehicles per year from its Chinese joint ventures. Consolidating production at fewer manufacturing locations will no doubt help Nissan improve manufacturing efficiency and would also make it easier for it to manage the transition to zero-emission vehicles.

Honda said its sales in China fell by 10% to 1,234,181 units last year, split more or less evenly between its two main joint ventures – GAC Honda and Dongfeng Honda with 620,469 and 613,712 sales respectively. Combined production was also close to 1.2 million units.

Honda’s two joint ventures have a combined production capacity of almost 1.5 million vehicles across seven plants. The two joint ventures are also scheduled to complete construction of two separate EV plants this year, each with a production capacity of 120,000 units, which would lift Honda’s total annual production capacity in the country to 1.73 million units.

Honda also said it plans to step up EV production from this year, as it tries to keep pace with the local market, with ten new models scheduled to go into production by 2027. The automaker aims to complete its transition to zero emissions in China by 2035 and is understood to have agreed to source batteries from Contemporary Amperex Technology Company (CATL).

Honda announced 900 redundancies at its GAC Honda joint venture at the end of last year as part of a cost-cutting drive, but much deeper cuts are planned as the company steps up its transition to EVs.  Unconfirmed reports suggest it is looking to cut production capacity in the country by 20%, with a company spokesperson acknowledging the need for more “rationalisation”. Honda also began exporting vehicles from China back to Japan and also to Europe last year to help lift capacity utilisation and these efforts will also likely be stepped up.

For some OEMs in China, there is clearly much more to do on China production footprints, not only to better balance supply and demand, but to address the unexpectedly rapid transition to NEVs.