Road to ruin?

One of the 20 million...

At first glance, the world’s largest car market appears to be accelerating ahead smoothly. Just last week a top industry official predicted the number of cars on China’s roads would more than double over the next decade – to a staggering 200 million automobiles.

The big numbers have boosted industry optimism, especially after a stellar 2009. According to China Business magazine, demand for some models was so far ahead of production last year that a whole new business was born: car speculation. New car waiting lists had got so long that delivery could take up to eight months. So enterprising hustlers like Yang Fan targeted the most popular buys – such as the Volkswagen Tiguan – and leveraged relationships with dealers to get hold of them. Would-be buyers could then jump the queue with Yang’s help – albeit at a price.

“I can help consumers get [a new car] in just 1-2 months, for those who are impatient and would rather pay Rmb50,000 ($7,350) more,” Yang told China Business.

Middlemen like Yang enjoyed the best of times in 2009. A surge in demand – hence those waiting lists – was helped by policies to promote sales including tax incentives and a trade-in subsidy for rural drivers.

Some of those policies began to fade out in the first half of 2010, and the Chinese press has been report ing a sales slowdown as the year progressed. Data from industry bodies suggests sales are still growing, although not as quickly as last year. But most major manufacturers seem to have budgeted for last year’s growth rates, so are now coming in below target. According to the latest figures, BYD is one of the furthest behind, selling about three quarters of forecast volume.

At the same time, production is still expanding across the industry. This year alone, capacity is expected to go up by five million cars, bringing the total to 20 million nationwide. Geely’s boss has told the Wall Street Journal that he plans three Volvo assembly plants in the country, capable of turning out 300,000 units. Beijing Hyundai, FAW Toyota and Chery are also all building new factories.

That’s leading to sales headaches. During the 2009 boom dealers were fighting for new supply. But a lot less so now, even as carmakers churn out more vehicles. “That many are now selling cars without making money is an open secret among dealers,” reports China Business News Weekly. Figures for July show unsold units at 1.47 million units, up from 1.3 million a month earlier.

For some dealers, it means more than two months worth of inventory is sitting on their forecourts. One salesman in Beijing told China Business he had no space left, and was parking up new arrivals in shopping malls and residential areas.

That is creating cash flow challenges. A recent report from the China Automobile Dealers Association warns that many will go bankrupt if the excess inventory doesn’t clear.

A new subsidy – which included a new rebate of Rmb3,000 for fuel-efficient cars – has brought some relief, reviving August sales (up 55% year-on-year). But the threat of overcapacity continues to haunt the industry. Factories are forecast to produce 31 million cars annually by 2015 (versus demand last year of 13.6 million vehicles).

“Serious overproduction capacity will lead to negative market competitiveness, a loss in enterprise efficiency, factory stoppages and other problems,” warns Chen Bin, a senior economic planner at the National Development and Reform Commission (NDRC).

At the moment carmakers are responding by cutting prices, with Rmb10,000 discounts on offer for smaller vehicles. Dealers are pushing for further discounts so that they can reduce the backlog of unsold vehicles. The other option is to reduce production. BYD is the first large manufacturer to bite the bullet, annnouncing it is cutting its annual sales forecast from 800,000 to 600,000 vehicles. Industry analysts are waiting to see if others follow suit.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.