The concept of overcapacity has been part of economic discussions for over a decade now, especially following the introduction of supply-side structural reforms in China in 2015. Since then, this issue has become closely associated with China's manufacturing sector, drawing both national and international attention.

In recent months, U.STreasury Secretary Janet Yellen also highlighted China's overcapacity during her visit, which was promptly countered by China's foreign ministryThis exchange underscores the global concern regarding China's manufacturing capabilities and the implications they carry.

China's transformation into the "world's factory" after its accession to the World Trade Organization has led to an exceptional accumulation of production capacityThis capacity isn't confined to traditional manufacturing; it extends to the engineering industry as wellA humorous anecdote in engineering reflects the circumstance perfectly: project timelines hinge on the speed of payments from clients, which showcases the extent of overcapacity

As long as funding is secured, contractors can ramp up operations and complete projects much more swiftly due to their vast capacity resources.

Evidence of China's capacity for on-demand production was starkly evident during the pandemic when the nation quickly pivoted to produce a massive quantity of face masksThis adaptability has established a reputation that when there's demand, Chinese manufacturers can meet it almost instantaneously.

But how excessive is the current overcapacity? Let us explore this through insights from industry experiences and financial reports.

As an employee of a large electronic manufacturing company, I can provide a firsthand accountOur production output at peak times was immense, with staff numbers soaring to around 30,000, primarily within the production departmentsA few years ago, our order volume was so high that production lines were operating around the clock to meet the demand

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To support this, dozens of assembly lines were running continuously, and human resources were actively recruiting a large workforce of operators to fill labor gaps.

At one point, it became necessary to even call upon managerial staff from the offices to provide urgent assistance on production lines, illustrating just how stretched our resources were.

In conditions of high demand, even essential tasks such as new product development would take a backseat, as fulfilling existing orders was deemed the top priorityUnder such circumstances, our capacity felt insufficientWe had to resort to unconventional strategies to satisfy orders relative to market demand.

This scenario is not isolated to my industry; sectors such as textiles, home appliances, and other light manufacturing also went through similar phases of frenetic expansion to accommodate seemingly endless orders.

However, as products entered the market, consumer demand began to taper off

Eventually, it shifted to a normal cycle of replacement and upgradesWith the industry maturing, market sizes plateaued, and players began scrambling for market share, leading to intense competitionThe previously constructed capacity now sat idle, necessitating a frantic internal competition among companies, hence the pervasive phenomenon of "internal competition" in various sectors.

Companies are now cutting prices to compete in the market and squeezing costs internallyIn a surprising trend, even companies from different sectors have started sharing employees to manage their operational costsCompany A might have reduced its workforce to cut expenses but then finds itself with a shortage when fulfilling an orderAt the same time, Company B might have excess personnel during this periodHence, these two companies can enter into agreements to share workforce resources, allowing B's workers to temporarily fill gaps at A

This scratch-your-back approach mitigates hiring costs while utilizing available manpower efficiently.

Nonetheless, such cost-saving measures barely alleviate the losses incurred by idle production lines, as evidenced in my own company's operations, where nearly one-third of the production lines are currently inactive.

This situation reflects the microeconomic level of just one companyOn a macro scale, a recent report from Goldman Sachs has caught industry attention for its enlightening analysis of China's manufacturing landscapeThe report evaluated seven manufacturing sectors: air conditioning, photovoltaic components, lithium batteries, new energy vehicles, power semiconductors, steel, and construction machinery, which collectively contribute 22% to China’s GDP growth.

The photovoltaic sector has experienced rapid growth over the past few years, with solar panels now adorning the rooftops in many rural areas across China

By 2023, China's supply of solar panels accounted for 86% of the global market, with exports making up a significant 42% of the productionAlarmingly, China's capacity in this sector was estimated at four times the domestic demand and twice the global demand, leading to a mere 44% utilization rate among manufacturers, highlighting extensive underutilization.

The new energy vehicle market is equally dynamic, commanding a 66% share of global supply in 2023 and experiencing 19% of its production as exportsHowever, the capacity at that time stood at 2.1 times the domestic demand and 1.2 times the global demand, with a utilization rate of 54%. While companies eagerly expand their capabilities in anticipation of increasing market share away from traditional vehicles, their optimism hinges on further growth in this sector.

Similarly, the lithium battery industry spectated an 81% share of the global supply in 2023, with exports making up 37% of production

Available capacity here was estimated at 3.3 times domestic needs and 1.5 times global requirements, resourced at a 61% utilization rateThis scenario is intriguing as the very market that once exhibited insatiable demand has now shifted to one fraught with excess capacity.

In the construction machinery sector, Chinese supply accounted for 33% of the global market, with exports claiming 53% of the outputFortifying this, the capacity in 2023 sat at 7.2 times the domestic requirement yet only slightly above the global need at 1.1 times, reflecting a stark utilization of merely 30%. This low utilization rate illustrates the impact of housing market fluctuations, which ripple through to the construction machinery sector.

In the air conditioning segment, China produced 75% of the global supply, while exports claimed 42% of the outputHere, the capacity mirrored the domestic market at 2.7 times, with global needs being met at 1.2 times, leading to a utilization rate of 62%. With the air conditioning market essentially being a mature industry that relies heavily on replacement cycles rather than new market growth—especially post-growth in real estate—the sector faces similar challenges of overcapacity.

Sector analytics also extend to steel, where China remained a dominant force, accounting for over half of the global output

The utilization rate was quite noteworthy at 81%, but a surprising aspect was that 20% of the capacity remained idle, despite earlier governmental reforms aimed at capacity management.

The root causes of overcapacity stem from a combination of rapid expansion based on prior demand forecasts and unexpected shifts in consumer behavior, culminating in an inability to reconcile supply with demandGlobal market tensions, such as counter-globalization impacts, further exacerbate the issue, leading to closed production facilities, as manufacturers aim to avoid building excess inventory that might amplify losses.

China's leadership understands the conflict; thus, there's a determination to balance market forces in resource allocation without relying on any singular entity's insight into the dynamic supply-demand equationThe cyclical nature of the economic model often leads to a pattern of "increasing demand — insufficient supply — expanding production — overcapacity."

Is overcapacity necessarily a detriment? From a holistic perspective of national economies, some degree of it can actually be beneficial