China in Transition_ China's capacity - The delayed inflection

Summary of Key Points from the Conference Call Industry Overview - The analysis focuses on seven significant global manufacturing industries in China, including air conditioners, solar modules, lithium batteries, electric vehicles, power semiconductors (IGBT), steel, and construction machinery, which collectively represent 25% of China's GDP growth in 2024 and 7% of exports [1][15][57]. Core Insights and Arguments - Capacity Imbalance: The state of overcapacity in China remains largely unchanged, with five out of the seven industries holding more capacity than global demand. This has led to challenging supply structures characterized by fragmentation and flattened cost curves [1][16]. - Domestic Demand Stimulation: A sizable stimulatory domestic demand has temporarily alleviated the capacity imbalance, particularly in electric vehicles, where pulled-forward consumption represented 16% of the domestic market [1][26][27]. - Cyclical Risks: The "Rule-of-Three" framework indicates a delayed trough inflection and negative cyclical risks ahead, primarily dependent on the pace of demand stimulation exhaustion [2][31]. - Sector-Specific Insights: - Solar: Currently at a cyclical bottom, closest to an inflection point, but negative demand outlook suggests inflection is not imminent [3][32]. - Electric Vehicles: Weakest profit profile and steepest cost curve, requiring consolidation during the downcycle [3][32]. - Top Producers: In sectors like air conditioners, lithium batteries, and construction machinery, the relative cost position of top producers remains strong compared to others [3][32]. Additional Important Content - Capacity Utilization: Average capacity utilization across the seven sectors is projected to be 63% in 2025, which is 4-5% higher than previous estimates. However, a decline of 3-6% is expected by 2026-28 due to supply-demand imbalances [23][24]. - Capex Trends: Significant cuts in capital expenditures (capex) have been observed, particularly in the solar industry (45-52% cuts for 2025-2026) and power semiconductors (30% cuts). In contrast, lithium batteries and electric vehicles have seen mild upward revisions in capex [45][49]. - Global Supply Position: China maintains a dominant position in global supply, accounting for 86% of solar modules, 80% of lithium batteries, and 74% of air conditioners as of 2024. However, the expansion of ex-China capacity may lead to redundant supply risks [57][58]. Conclusion - The overall outlook indicates that while temporary demand stimulation has provided some relief, the underlying issues of overcapacity and fragmented supply structures persist. The cyclical risks remain negative, and the path to long-term consolidation is complicated by the current market dynamics and the need for further capacity exits [16][31][32].