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The long and short of China’s 10 million mark in output

China celebrated the assembly of the 10 millionth automobile, a Jiefang (Liberation) J6 tractor trailer, on October 20 in Changchun, headquarters of China First Auto Works (FAW), thus becoming the world’s 3rd country that is capable of annually producing over 10 million automobiles.

Officials chose FAW’s Jiefang truck as a symbolic 10 millionth vehicle made in China because FAW is China’s first automobile factory founded in 1953 and China’s first motor vehicle, the Jiefang CA10 medium truck, came off the assembly line in July 1956.

There was every reason for China to celebrate this milestone accomplished in little more than 50 years. But if we take into consideration that it took China 40 years from 1953 to 1992 to realize annual output of one million vehicles and another eight years until 2000 to reach two million units, the additional eight million have been added in less than a decade in the new century. Output and sales of this year are expected to reach well over 12 million.

There is no doubt that automobile demand in China will sustain in the foreseeable future thanks to the continued growth of the national economy, expanding industrialization and urbanization and rising per-capita GDP. But as the country celebrates this milestone and joins the world’s “10 million vehicle club,” a number of hidden problems and new challenges are looming, which require the attention of both the industry and the government.

One is increased dependence on imported oil. Already China has become the world’s second largest oil importer after the U.S. Last year China imported 200.67 million tons of oil, showing a dependence rate of 51.4 percent. According to a study conducted by NDRC’s Energy Institute, China’s demand for oil will likely to rise to 600 million tons by 2020, raising import dependence to 60-70 percent. Developing fuel-efficient and new energy vehicles are therefore of utmost importance for the growth of the auto industry.

Secondly, hand in hand with the issue of energy consumption is emission control, the reduction of CO2 and environmental protection. The growing number of automobiles on the roads, substandard emission control, low-quality diesel and gasoline fuel will exert increasing pressure on the environment.

Thirdly, the exceptional growth this year has benefited from proactive government stimulus policies such as reduced sales tax, cash for clunkers and rural subsidies. Once such policies discontinue, there will be the danger of a backlash that sales may significantly drop in the next year or two.

Fourthly, automakers across the board are adding investment to expand capacity as a result of the unexpected robust demand this year. The danger of overcapacity is again looming especially if the market slows down.

Last but not the least, the 10 million vehicles in China this year have been made by over 100 manufacturers compared to less than 10 in the U.S. and in Japan, which means that China’s auto industry still lacks economies of scale. The government stimulus policies have driven up sales and demand but in the meantime they have helped create a haven for smaller, inefficient and non-competitive automakers that still remain profitable, much against the government’s wish for an industry consolidation.

 

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