China’s manufacturing sector, once hailed as a pillar of technological self-reliance, is now facing a stark reality. The “ghost factory” problem, where factories built at breakneck speed are now idling, warehouses overflow with unsold goods, and subsidies prop up businesses that would otherwise collapse, is most acute in two key industries: semiconductors and electric vehicles.
The semiconductor sector, which accounts for 39% of global mature-node capacity by 2027, is outpacing demand due to Beijing’s “complete industrial chain” ambition, fueled by state subsidies. This has led to a flood of entrants, many of whom operate at a loss. Meanwhile, geopolitical tensions have worsened the imbalance, pushing Chinese firms to over-invest in legacy nodes, creating a “race to the bottom” in pricing.
The electric vehicle (EV) industry, which produced 12.4 million vehicles in 2024, is now drowning in overcapacity. A price war, driven by BYD’s discounts and Tesla’s aggressive pricing, has slashed average prices by 19% since 2022. Smaller players are collapsing, while even export strategies are at risk due to trade barriers.
Investors must heed the warning signs of a green manufacturing bubble, as subsidies and geopolitical tensions fuel unsustainable investments in industrial capacity. The risks include write-downs and stranded assets, as firms relying on subsidies face margin erosion and declining market share.
To navigate this landscape, investors should short overexposed stocks, such as SMIC and BYD, while long technological leaders like TSMC, ASML, and Tesla. Macro plays, including shorting the iShares MSCI China Tech ETF (CSET) or long the Global X Autonomous & Electric Vehicles ETF (DRIV), can also provide a hedge against the risks.
The green manufacturing bubble may yet burst, leaving investors who ignore its risks to pay the price. As data underscores the unsustainable trajectory of state-backed overinvestment, it’s clear that China’s ghost factories are a symptom of a deeper problem: subsidies and geopolitical posturing have prioritized industrial scale over market efficiency.
Source: https://www.ainvest.com/news/ghost-factories-green-manufacturing-bubble-cautionary-tale-investors-2507