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The danger of overcapacity behind aggressive sales targets

Major carmakers lately announced their respective sales targets for 2010. Interestingly, most Sino-foreign joint ventures expect an average increase of around 20 percent for the year, while independent brands, like JAC, BYD, Great Wall and SAIC Motor, eye an average growth rate of nearly 100 percent.

China’s independent brands have been on a spree in capacity expansion since the middle of last year. BYD signed an agreement last July to take over Midea Coach Manufacturing Co., Ltd. and turn it into BYD’s electric bus and passenger vehicle production base in Changsha, capital city of Central China’s Hunan Province. The battery and auto maker also initiated capacity expansion in its Shenzhen and Xi’an plants to increase total capacity to 800,000 units, which is the number of vehicles BYD aims to sell in 2010.

Both Chery and Geely eye sales volume of 2 million units in 2015 according to their long-term plans. Earlier, Geely decided to pump up capacity of its Lanzhou production base to 120,000 units from 50,000. Chery began building a new plant in its headquarters city of Wuhu, with a land area of 1.6 million square meters and investment of ¥10 billion ($1.47 billion). In addition, Chery will also launch a new assembly plant in Dalian with an investment of ¥4.7 billion and an annual capacity of 200,000 passenger vehicles scheduled to start production in June 2011.

In contrast, despite shortage of capacity, most Sino-foreign JVs are cautious in building new plants. Tianjin-FAW-Toyota has not revealed plans of capacity expansion, even though consumers have to wait for at least one month for an RAV4 SUV. In order to elevate output, FAW-Volkswagen turned its production line from two-shift to three-shift instead of building new plants.

Support from local governments has become the main drive for independent automakers’ rush in adding capacities. For instance, the Lanzhou municipal government announced its plan of building a regional automobile industry hub with investment of over ¥10 billion in the wake of Geely’s launch of new production facility there. As the capital city of Northwest China’s Gansu Province, Lanzhou joined the team of emerging cities to boost auto manufacturing after Changsha, Beijing, Wuhu, etc, to compete with traditional motor cities such as Changchun, Wuhan and Guangzhou.

Structural overcapacity not only exists between independent brands and JV automakers, but also in certain vehicle segments and models. According to incomplete statistics, existing and planned microvan capacity has reached 7 million units, while total demand is estimated at 3 million units this year. Overcapacity in the microvan segment is looming dangerously large at present.

According to a report by the Ministry of Industry and Information Technology (MIIT), China’s total automobile capacity will stand at about 23 million units in 2012. Idle capacity may account for about 30 percent. As some analysts said, the level may be safe for China given the market’s growth potential. However, overcapacity driven by overheated investment remains an issue to be closed watched. Real market consolidation is expected in the near future which will help avoid repeated construction and wasted resources.

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