Overcapacity looms for Chinese automakers

Chinese Manufacturing News, May 30, 2011

The combined sales targets of China's largest automakers could exceed total demand by as much as 32 percent by 2015, as the pace of plant construction outstrips sales growth forecasts.

"The industry may face excessive capacity as early as next year," said George Yin, an analyst with BOCOM International Holdings Co. in Beijing.

Privately held Zhejiang Geely Holding Group Co., Great Wall Motor Co. and BYD Co. "are boosting their capacity more aggressively than joint ventures and state-owned firms and exposing themselves," Yin said.

China's auto sales fell 0.25 percent in April, the first year-on-year decline in 27 months, after the government phased out tax breaks and subsidies.

But automakers are expanding to gain more share in a market that has expanded tenfold in the past decade amid rising affluence and government stimulus policies.

Last year, industry sales in China totaled 18 million vehicles. But overcapacity may reach 3 million units next year, according to Yin.

Geely, BYD and Great Wall each plans to expand capacity more than 55 percent by 2015, Yin said.

Unbalanced supply and demand will affect Chinese automakers more than international companies such as Volkswagen AG and General Motors Co. Chinese consumers will trade up to foreign brands for their second cars, predicts Bill Russo, a Beijing-based senior adviser at Booz & Co.

Shanghai-based SAIC Motor Corp., which has partnerships with GM and Volkswagen, will be less exposed to sales and margin squeezes for the same reason, he said.

"This will drive the China automakers to more aggressively pursue selling these cars in emerging markets," Russo said. "Otherwise they will have underused their assets."

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