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Automobile industry too hot?
By Gong Zhengzheng (China Daily)
Updated: 2004-03-18 11:14

China's auto industry is running in the red due to the involvement of non-auto companies trying to move into the sector, according to the sector's watchdog.

But the overheating fear is not shared by scholars and manufacturers.

Wang Chunzheng, vice-minister of the National Development and Reform Commission (NDRC), said it is necessary for the government to take immediate measures to prevent "blind investment and excessive construction" in industry, where competition has been fierce,

China's annual vehicle manufacturing capacity will total almost 15 million units by 2007, while annual demand will only be 7 million units, including 3.4 million passenger cars, according to NDRC, the auto industry's main watchdog.

Total investment in building new auto manufacturing capacity will amount to 216.6 billion yuan (US$25.5 billion) by 2007.

"More and more vehicle manufacturing capacities are being controlled by fewer multinationals through mergers and acquisitions (M&As) around the world," Wang said.

"But in China, some automakers are being merged by big names and many new projects are still being built."

There are more than 120 vehicle plants in China. Last year, the number of passenger car producers increased by a dozen to hit 32.

More non-auto players are rushing into the lucrative industry, raising concerns about overheating.

AUX, a privately owned home appliance maker in East China's Zhejiang Province, announced last month that it plans to invest 8 billion yuan (US$966 million) to produce cars over the next four years to cash in on the booming market.

AUX says it will have an annual manufacturing capacity of 450,000 units by 2008.

Lifan, a motorcycle producer in Southwest China's Chongqing Municipality, plans to invest 500 million yuan (US$60.4 million) to gain an initial manufacturing capacity of 50,000 cars and 50,000 engines.

The company will use the assembly line bought from British automaker MG Rover to produce cars in Chongqing.

Bird, a mobile phone maker in Zhejiang, will also start to produce cars in a base in neighbouring Jiangsu Province later this year.

Chemical company China National Blue Star Corp last month signed a letter of intent with British automaker Manganese Bronze Holdings to set up a joint venture (JV) to make taxis in Lanzhou, capital of Northwest China's Gansu Province.

Even Wuliangye, an alcohol producer in Southwest Sichuan Province, reportedly intends to invest in car manufacturing.

"Massive capital inflows indicate that the auto industry in China has huge potential and bumper profits," said Qian Pingfan, an industry expert at the Development Research Centre under the State Council, China's cabinet.

"We cannot see the industry overheating with the entry of more players because real competition just kicks off and it is far from maturation."

Currently, the average profit margin of major passenger car manufacturers stands at 25 to 28 per cent, much higher than international levels, according to Qian.

"Only through fully market-driven competition can the profit margin be brought down and can the industry enhance competitiveness," he said.

The industry will regarded as mature when the profit margin declines to around 5 per cent.

"Many less competitive players will be phased out of the industry amid mounting competition and only 8 to 10 automakers in China will be able to survive with the backing of their big foreign partners over the next 10 years," Qian said.

One-third of more than 120 vehicle plants in China have an annual output of less than 1,000 units.

All of the world's top nine automakers General Motors, Ford, Toyota, DaimlerChrysler, Nissan-Renault, Volkswagen, PSA Peugeot Citroen, BMW and Honda have built JVs with Chinese companies.

"The auto industry, which has become one of the biggest growth engines of China's economy, will be jeopardized if the government hastes to quench investors' enthusiasm," Qian said.

"What the government should do is improve the investment and consumption environment to create favourable conditions for the fast and healthy development of the auto industry."

The government should also control direct State investment in the industry. Vehicle demand in China will continue to grow rapidly, to provide enough room to more players to combat.

Annual demand will reach 18.9 million vehicles by 2020, including 17.3 million passenger cars, according to a research centre prediction.

Last year, sales of domestically-made vehicles rose by 34 per cent to 4.39 million units. Passenger car sales shot up by 75 per cent to 1.97 million units.

However, local regulators have underestimated the growth potential demand.

The State Economic and Trade Commission, one of the former auto industry watchdogs which was dismantled in a government reshuffle last year, predicted in 2001 that national demand would reach only 3.3 million units by 2005, including 1 million passenger cars.

But the sales of both total vehicles and passenger cars made in China exceeded those levels by 2002.

"The government's anxiety for the auto industry's overheating is unnecessary because those new comers are very experienced market players and not idiots," said Yale Zhang, a Shanghai-based analyst from CSM Worldwide, a US auto consulting firm.

"Their seemingly aggressive plans will be carried out in a step-by-step manner not overnight. They will withdraw or be merged by stronger rivals if the auto market goes down one day or they are unable to deal with competition."

There have been several M&As between automakers in China in recent years.

In 2002, First Automotive Works Corp (FAW), the nation's No 1 automaker, acquired a 50.98 per cent stake in Tianjin Xiali Automobile in North China's Tianjin Municipality, the biggest M&A seen so far.

Beating regulators' concerns, many relatively competitive carmakers in China lack manufacturing capacity to meet consumer demand and are heavily investing in building new facilities.

"We can only increase output to 330,000 cars this year from 300,000 last year because of our insufficient capacity," said Qin Huanming, president of FAW VW, FAW's JV with Germany's Volkswagen Group.

The JV is building a new 330,000-unit car plant in Changchun, capital of Northeast China's Jilin Province.

"We should not jump to the conclusion that the auto industry is overheating when it is facing unprecedented opportunities as result of China's steady economic growth," said Zhu Yanfeng, general manager of FAW.

FAW will invest 20 billion yuan (US$2.4 billion) in Jilin Province to expand its auto business over the next five years, Zhu said.

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