Glut warning for China’s auto industry

Financial Times, September 20, 2010

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By Patti Waldmeir in Chengdu

The Chinese auto market makes a habit of defying even the most optimistic of predictions.

But when a Chinese government official warned recently that head-long investment by the car industry would leave China with a big overcapacity problem by 2015 – when capacity reaches 31m vehicles per year – he touched off a fierce debate over whether the domestic market can absorb all those cars or whether some will be dumped cheaply on world markets.

Serious overcapacity will lead to negative market competitiveness, a loss in enterprise efficiency, factory stoppages and other problems,” Chen Bin, a top official at the National Development and Reform Commission (NDRC), China’s economic planning agency, said recently. A Chinese car industry producing 31m vehicles would be nearly twice the size of the current domestic market – estimated at 16m-17m this year – and well over double the current US market.

Charlene Barshefsky, former US trade representative, predicts a new trade war in the making. “The glut will be destined for export and that will increase trade tensions,” she told a car industry conference in the Chinese city of Chengdu last week.

But Chinese carmakers dispute the very notion of overcapacity. “We believe the domestic market demand will reach 25m units [by 2015] and therefore annual capacity of 30m should not be considered too much,” the China Association of Automobile Manufacturers said.

The problem for many of the leading carmakers at the moment is not excess capacity, but lack of it, says Mike Dunne of Dunne & Co, an Asian car consultancy. “The top 10 carmakers, with 90 per cent of the market, are short of capacity,” he says.

Ivo Naumann, of motor industry advisers AlixPartners in Shanghai, says the overcapacity numbers may be exaggerated, since they are based on often inflated projections from car companies themselves. And even if all that capacity eventually materialises, it is far from clear that the market will be too weak to absorb it.

“The NDRC warned about overcapacity in 2006, but they were proved wrong,” says Yang Jian, editor of Automotive News China.

“The capacity problem will be solved over time,” says Bill Russo of Synergistics, a Beijing auto consultancy, and former head of Chrysler in China. He says the problem is not total capacity, but which companies are building the new factories: Chinese car companies are adding capacity much more quickly than their stronger foreign rivals.

“Local brands are adding capacity in the belief that they can capture half the market by 2015,” says Mr Russo, up from 30 per cent now. “However, this is proving quite difficult since Chinese consumers are typically not loyal to Chinese brands,” he adds.

The Chinese government is not just worried about excess capacity. It has also struggled for years to force the consolidation of the highly fragmented car market, which Mr Russo says comprises 120 vehicle manufacturers.

Beijing has called for the formation of four large state-owned national “champions” producing 2m vehicles per year each, and four more companies producing 1m each.

But in such a strong car market – Chinese sales rose 46 per cent last year – there is little incentive to consolidate. “It’s difficult to get any kind of consolidation in the face of tremendous growth in this market,” says Mr Russo.

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