China might not be the kind of market everyone thought it was — one without a ceiling, boasting unlimited potential for growth. One by one, automakers find themselves having to confront economic reality.

Despite amassing a network of factories that could theoretically outproduce the rest of the world, the Asian country’s automotive sector only operates at about half its total capacity. That’s disconcerting. Even Europe, site of some serious industrial headwinds of its own, manages to operate around 70 percent capacity.

While the reasons for China’s woes are ludicrously complicated, one of the most pressing issues is that its economy is slowing much earlier than anticipated. Automakers, both foreign and domestic, almost universally believed that The People’s Republic would surpass the United States as the world’s largest automotive market — and they were right. But investments kept pouring in, factories were built, and the market started to cool prematurely. The situation only grew worse as incentives dried up and people began buying fewer cars; now, 2019 is shaping up to be a very bad year for the nation’s automotive sector. 

An article from the The New York Times outlined the country’s general plight this week, suggesting that some car buyers might never return due to a flourishing ride-hailing businesses. China’s Didi currently carries twice as many riders in China as Uber does in rest of the world, and it’s just one of several large ride-hailing firms operating within the country.

“None of the multinational automakers foresaw how disruptive that would be to demand,” said Bill Russo, a former chief executive of Chrysler’s operations in China.

Due to China’s aggressive push to encourage automotive startups focused on electrification, abandoned facilities are popping up everywhere. We previously reported that the nation’s hundreds of EV startups likely faced a survival rate of around 1 percent. But even traditional automakers with deep pockets and decades of experience are struggling.

Hyundai is currently considering cutting capacity there, according to a recent report from Reuters. After Hyundai’s China sales sank 23 percent in the fourth quarter, Chief Executive Lee Won-hee is weighing options. Internal documents suggest that the automaker is considering shipping vehicle kits from China to Philippines, South America and other countries for local assembly.

From Reuters:

A Hyundai Motor spokeswoman said that the automaker is “reviewing various optimization plans to enhance facility efficiency” and has begun voluntary retirement for employees in China.

China’s auto industry, the world’s biggest, is slowing after strong recent growth, with demand hit a weakening economy and the fallout of trade frictions with the United States. China’s car sales fell 2.8 percent in 2018, marking the first contraction since the 1990s, according to industry association data.

Due to China’s lukewarm friendship with North Korea, South Korean exports have taken a sizable hit there — especially after the United States helped bolster its missile defense network. China felt that the armaments were too close to its own borders, souring its already strained relationship with South Korea. This led to national animosity and reduced sales for companies like Hyundai, which already wasn’t doing so hot in the market.

Relations improved through 2018, but sales never rebounded.

However, Hyundai isn’t alone in its troubles. Ford was forced to fire thousands of Chinese workers through its joint ventures, Honda is rumored to be cutting capacity significantly, and even General Motors (which has performed exceptionally well in the region) finds itself facing some difficult production decisions.

The Chinese market prefers Chinese cars but, with domestic customers pulling back, exports seem the only real way for it to move forward. However, its ongoing trade war with the United States has made that possibility an issue. It’s also hurt the Chinese economy overall, further hampering at-home sales. China’s manufacturing hubs, like Guangdong, are clearly suffering due to the tariffs. But it’s difficult to pin down how bad things have gotten, as the Chinese government is believed to downplay the country’s unemployment to a high degree. The fact it’s even admitting there’s a problem should be telling.

“Many of the companies in Guangdong province have permitted leave for their employees since November — many of the export companies,” Zhang Liqun, research fellow at the Macroeconomic Department of the Development Research Center of the State Council reportedly told CNBC this week. “That has something to do with the U.S.-China trade frictions … Many of these companies think they have done what they can do before November and they are not planning to organize further production after that.”

While the trade war undoubtedly hurt China, it isn’t the only issue affecting its auto industry — an industry overextended by an entire planet betting on its seemingly unlimited potential for prosperity. Whether or not it can bounce back and continue its upward trajectory remains to be seen, but plenty of manufacturers are starting to come down from the clouds. China is still the world’s largest automotive market, just not the money-making machine everyone envisioned a few years ago.

[Image: General Motors]

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