If I understand it correctly, someone could create a “cars” community on lemmy.world and someone else could create a “cars” community on another instance. Neither community gains enough traction to take off but if they had all been one it would have worked.

That seems problematic to me. Am I understanding it wrong?

You’re not necessarily understanding it wrong, and there is a potential problem there, but I think this view focuses on the problems over the benefits that this can provide. Think about how certain communities on Reddit were the only community for their subject there, and if you didn’t like the culture of the community or the moderation, your only choice was to create your own community with some variation on their name or some clunky name like “carswithblackjackandhookers” to signal how/why your similar community existed.

Here, you have the benefit of being able to create communities around the same subject with the same name (besides the domain, e.g. @lemmy.world/lemm.ee) but with different rules and moderation to make the community as you like it. There is the possibility it means neither community takes off, for sure, but there’s also the possibility both do well enough & have distinct enough posts & conversation that you now get two communities focusing on the same subject but with a greater variety of perspectives.

I realize that latter view may be a little on the optimistic side, but tbh we saw this even on Reddit with different communities around the same subjects. If anything finding those communities was harder there thanks to them having to adopt more & more arcane names thanks to abandoned, and existing communities but with different focuses.