why does excess capacity matter 
although excess capacity can indicate healthy growth too much excess capacity can hurt an economy if a company cannot sell a product for an amount at or above its production cost then the company could lose money by selling the product for less than it paid to make the product or the product could just go to waste by just sitting on the shelf if a company needs to close a plant because of having too much capacity then jobs are lost and resources are wasted a company with a lot of excess capacity can lose sizable amounts of money if the business cannot pay for the high fixed costs that are associated with production on the other hand excess capacity can benefit consumers as a company can utilize its excess capacity to offer customers special discounted prices companies also may choose to maintain excess capacity deliberately as part of a competitive strategy to deter or prevent new firms from entering their market example of excess capacity chinasince 2009 the chinese economy has been engulfed in its third round of excessive capacity earlier periods of excess capacity ran between 1998 and 2001 and again between 2003 and 2006 even though china became the world s second largest economy in 2010 it continues to face both internal and external economic challenges excess capacity in china s manufacturing industries including steel cement aluminum flat glass and especially automobiles is one of its biggest challenges excess capacity potential output actual outputthe chinese government has taken numerous steps to address this problem but it continues still in industrial economies excess capacity is generally a short term condition that is self correcting however the severity and persistence of excess capacity in china s manufacturing sectors suggest that there are deeper more fundamental issues within the chinese economy these problems also have significant implications for international trade given the growing influence of china in the global marketplace typically auto assembly plants have a lot of fixed costs to cover also most new factories in china depend on economic incentives from local governments so there is pressure to keep the factories open and people employed whether they can sell the excess output or not moreover all of those extra cars need to find a home which could mean price wars and lower profits in china s domestic market along with a flood of exports to the u s and elsewhere for companies like general motors gm who now derive significant sales and earnings from china that cannot be good news one issue is that there is little incentive to remove excess capacity from the chinese market nobody wants to close a relatively new factory in china and risk the acrimony of a local government also after almost two decades it seems improbable that the excess capacity trend in china would abate any time soon coronavirus covid 19 slammed the auto industry amid the outbreak in february 2020 china experienced a greater than 80 decline in auto sales but because more than 80 of the world s auto supply chain is connected to china production shortfalls resulting from disruptions to the auto industry in china affected automakers across the globe most of the world s automotive and related companies believe that the covid 19 pandemic would have a direct impact on their 2020 revenues because covid 19 originated in china china also likely would begin its recovery from the pandemic earlier than europe and north america yet it is still too soon to know for certain not only what the long term economic effects of covid 19 will be but also the degree to which this newest setback would affect china s historically troubled relationship with the phenomenon of excess capacity 