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China to quicken steps for structural readjustment in auto industry

The State Development and Reform Commission (SDRC) is planning on putting into effect some measures to address the structural overcapacity in China’s auto industry, according to a news report in Diyi Caijing Ribao (China Business News).
In a circular issued in June, the threshold for starting an automobile project in China is greatly increased in order to aid macro-control expansion of auto projects in the country. It requires that all newly established complete vehicle manufacturers, and all new investment in cross-product projects of existing manufacturers, should meet the requirements for independent innovation, in addition to the industrial policy. Furthermore, manufacturers planning to set up a new production plant must sell at least 80 percent of its output capacity. The requirements for the entry of foreign investment are also made considerably more stringent, with approval being denied to any low-quality projects with high energy consumption or heavy pollution.
This readjustment of China’s auto industry aims to restrain local investment in small-sized auto companies, while at the same time planning for larger auto projects. The SDRC will inspect those projects under construction and raise the standards for new projects awaiting approval.
Currently China has about 200 whole vehicle manufacturers with the ability to produce 8 million units a year. This capacity is only growing larger, as new investments in the auto industry increased to over ¥100 billion in 2005. One noteworthy fact, however, is that while the production value of 6,315 auto companies in China increased by 8.6 percent last year, their total profit went down 24.3 percent. Even more noticeable is that the profits of 14 major automakers decreased by about 40 percent last year and 1,155 auto firms incurred losses – 63 more firms than in the previous year.  
“Some rapidly expanding foreign automakers are the target of this regulation,” said a marketing director of a local company, “but objectively domestic automakers will be affected most, for they are basically supported by government, having small maneuvering space on the market.”
In the past few years, considerable progress has been made on structural development and adjustment in the auto industry. Independent car brands have accounted for 25 percent of the total production and sales in China. Independent commercial vehicles have taken up more than 80 percent of the domestic market, and independent lower-end passenger cars and mini buses have dominated over 90 percent of the market in 2005.
The structure of the auto industry still has a few problems, however. Among the top 15 automakers in China, there is only one private enterprise. This unusual industrial structure has presented a lot of difficulties in mergers and acquisitions. Another problem the industry faces is that the production structure is slow in upgrading technology. There is a long way to go towards producing more fuel-efficient and environmentally friendly cars. In addition, over-reliance on foreign technology and imports has resulted in weak development of independent brands, with many automakers doing assembly work for years. Compared to other auto markets, China lags far behind in the development of auto parts and components.
By making structural adjustments, China plans to encourage domestic auto manufacturers to further develop their innovative potential in technological research, and to produce more and better cars of independent brands.
“Independent auto brands should take up about 60 percent of the market share during the period of the 11th Five-Year Plan,” said an official from SDRC. “The key to competition is to get used to the choice of market, just as what the Japanese and Korean automakers have done in raising the market share of domestic products.”

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