With 123 car plants in China, overcapacity is only expected to get worse

In 2014 China produced 20.98 million vehicles according to the Chinese Association of Automotive Manufacturers, extending its lead as the world’s largest and most profitable car market. Currently there are 90 brands and 475 models available on the market.

Increasingly, domestic and foreign-based car makers are putting their margins and profitability at risk by building more factories in China than anywhere else in the world.

By 2017 there will be 140 car plants in China, the highest number of any auto producing nation, with 11.4m vehicles worth of idle capacity.

One leading forecaster says that factories across mainland China have the capacity to build 10.8 million more vehicles than will be sold in greater China.

With so many car plants the problem of overcapacity will only get worse.

‘A rough rule of thumb in car making is that assembly plants need to be working above about 75 per cent capacity, assuming two-eight hour shifts each normal working day, to be profitable’, says The Economist, one of the world’s leading independent news magazines. ‘In contrast the average for Chinese assembly plants has now slipped to below 70 per cent.’

The enthusiasm for building in China began in 2007-08 when European manufacturers such as VW and American automakers including  Chrysler and General Motors sought refuge from the Global Financial Crisis by going into joint ventures with state-owned manufacturers to build cars in China.

GM has 22 factories on the mainland while Volkswagen has 28 and plans to open three more over the next few years. Renault, Hyundai and Fiat-Chrysler Automobile’s Jeep have already built or have plans to commence manufacturing there in the next few years.

Not only that, but as the world’s largest economy slows, so too do new car sales.

Many buyers in China are now opting for second hand cars for the first time ever, especially now that there is an abundant supply of used stock. (See page 26)

New car dealers are also doing it tough and feeling the impact of the downturn as well as the increased restrictions on new car ownership by city governments.

Dealers are calling for financial support and lower sales targets from OEMs. They also want manufacturers to pull-back on Dealer expansion and reductions in their sales targets.

What’s the solution?

China’s policy makers say that the auto industry should focus on better inventory management, production optimisation and creating economies of scale. Also, auto makers ‘waiting at the gate’ to enter the Chinese market may find it harder to get into the market.

Consolidation will also help streamline the local manufacturers, placing them in a better position to take on bigger foreign rivals. Finally, many commentators think that structural change is long overdue in the Chinese auto industry.

Time will tell.