China Beating U.S. in Car Sales Means Overcapacity

Bloomberg.com, December 9, 2009

Dec. 9 (Bloomberg) -- Ai Li’s Buick may help push China past the U.S. as the world’s largest car market this year. That may be little consolation to General Motors Co.and Volkswagen AG as overcapacity in the country saps profits.

Ai, a 30-year-old Beijing book editor, stopped saving for an apartment and bought a Buick Excelle in September, lured by a tax cut of 6,000 yuan ($880) for the car.

“Nobody knows whether the tax cuts will still be there next year,” said Ai. “It’s safest to buy now.”

The subsidies have helped cause a 42 percent jump in China vehicle sales this year. The country is set to surpass the U.S. as the world’s largest auto market and is drawing investment from Ford Motor Co., Hyundai Motor Co. and GM. Next year, growth will slow to less than 15 percent, according to Volkswagen and SAIC Motor Corp., as subsidies end, threatening profit margins in an industry that can already build more cars than it can sell.

“Automakers have been relying on surging sales growth to offset profit margins that are falling because of rising competition,” said Jenny Tian, a Beijing-based partner at Springs Capital, which manages $160 million in assets. “That won’t work next year.”

China’s full-year sales may be about 13 million, compared with industrywide capacity to build 15 million vehicles, according to Booz & Co., which advises carmakers and investors in China. By 2015, output may reach 15 million, while capacity may be 20 million, according to Koji Endo, managing director of Advanced Research Japan in Tokyo.

Low Margins

“Automakers need to make sure they have the right size and the right models in the China, otherwise they will be left with overcapacity and lower profits,” he said.

Volkswagen, the second-biggest foreign automaker in China, is in talks to form an alliance with Suzuki Motor Corp., a person familiar with the matter said. Both companies declined to comment on a possible tie-up.

China’s 100-plus automakers are wrestling with low margins because of competition and a preference for low-priced models. Carmakers get an average profit per vehicle of between $1,000 and $3,000 in China, depending on model size, compared with about $10,000 in the U.S., according to Endo.

“There’s a huge gap in profit between China and the U.S.,” said Yale Zhang, a Shanghai-based director at CSM Asia, an auto consulting company. “It may take China three to five years to surpass the U.S. in terms of profit.”


About 20 percent of China’s auto sales are low-cost commercial vehicles that sell for as little as $5,000, Zhang said.

Automakers face possible overcapacity in China after expanding to offset sales slumps in the U.S., Europe and Japan. U.S. vehicle sales dropped 24 percent to 9.4 million in the first 11 months because of recession and rising unemployment, forcing General Motors Corp. and Chrysler LLC into bankruptcy. China vehicle sales rose to 12.2 million.

Chen Bin, who oversees regulation of China’s auto industry, also said in September that automakers should “keep their heads cool” to prevent excess expansion.

China’s auto subsidies and tax cuts are due to expire around the end of the year as the government completes a 4 trillion yuan stimulus package that also includes measures for electronics, appliances and houses.

BMW, Daimler

The end of the support measures may cause a slowdown in auto sales. Ai bought forward plans to buy a car because of the incentives.

“In the short term, because of the tax incentives, there is some cannibalization now of future sales” in China, said Yoichi Hojo, Honda Motor Co.’s chief financial officer.

Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, said last month it plans to build a new factory in China to meet rising demand for premium products. The 5 billion yuan plant will have an initial capacity of 100,000 vehicles a year by 2012, eventually rising to 300,000.

Daimler AG Chief Executive Dieter Zetsche has said he aims to surpass BMW in the country and then supplant Volkswagen AG’s Audi as the Chinese luxury-car leader.

Mercedes 10-month sales in China surged 48 percent to 53,300 vehicles. Audi delivered 123,400 cars to Chinese customers during the same period. BMW sold 72,000 cars in China in the first 10 months of the year.

In the U.S., auto sales fell 23 percent in September after the government’s “cash for clunkers” incentive plan ended Aug. 24. The program boosted August sales 1 percent from a year earlier, the first monthly increase since 2007.

Tax Cuts

China may consider extending some auto tax cuts, Ministry of Industry and Information Technology spokesman Zhu Hongren said last month. GM and Ford have both said they expect the government to offer some support next year to prevent a slump.

Honda hasn’t made any decision about whether to add new plants in China, Hojo said. The Tokyo-based company is running at full capacity of 550,000 vehicles a year in China, he said.

“In the long term, car sales in China will grow faster than GDP growth,” he said.

China, home to 1.37 billion people, may boost its economy 9 percent next year, according to the International Monetary Fund. The nation has 38 vehicles per 1,000 people, less than a third of the world average.

Hyundai, Toyota

Other carmakers are pushing ahead with expansion plans. Ford and local partnerChongqing Changan Automobile Co. began work on a third car plant in September. GM, the biggest overseas automaker in China, said in August that it will form a commercial vehicle-making venture with China FAW Group Corp. Volkswagen, ranked second, plans to invest 4 billion euros ($5.9 billion) in the country by 2011.

“If you establish something now, the worst that can happen is you have to wait a year or two” before demand catches up to capacity, said Joerg Mull, Volkswagen’s chief financial officer for China.

Seoul-based Hyundai is planning to build a third Chinese factory as it aims to boost local capacity by 50 percent to 900,000 vehicles a year by 2011. Toyota Motor Corp. has said it intends to raise production capacity in China to 970,000 vehicles a year from about 803,000.

“We are not going to see overcapacity in China,” said John Zeng, a Shanghai-based analyst at IHS Global Insight. “They’re anticipating the growth trend.”

While growth may come, the surging investment in China may outpace sales, leaving automakers slashing prices to keep assembly lines moving, said Bill Russo, a Beijing-based senior adviser at Booz & Co.

“That’s the risk in China,” Russo said. “Supply seems to be going up in excess of demand.”

For Related News and Information: Auto statistics: ATSL BRIC monitor: BRIK China car news: TNI CHINA AUT Most-read auto stories: MNI AUT 1W Today’s top transport news: TRNT

Last Updated: December 8, 2009 20:27 EST

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