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China’s Auto Industry: The Joys and Sorrows

The current situation of China’s automobile industry.

China has become the third leading car manufacturer in the world. In 2005 alone, China manufactured 5.6 million cars. However, an over-investment in the Chinese car industry has led to an excess production capacity and decreased profits.

According to figures disclosed by the China Association of Automobile manufacturers on December 9, 2005, in the first 11 months of 2005, China manufactured 5.15 million cars, a 10 percent increase over the same period in 2004. During the same time, 5.14 million cars were sold, an increase of 12 percent compared to the same period a year ago. Both the number manufactured and the number sold surpassed the totals of 2004 by 10 percent or more.

Even though both the total manufactured and the total sold has increased by such a large margin, the authorities have been worried about overinvestment and excess production capacity in China’s automobile industry. One study done by China’s National Development and Reform Commission shows while there are 117 automobile factories, over 90 of which produce less than 10,000 automobiles a year, they are nowhere close to reaching economies of scale. In the first 10 months of 2005, although the total manufactured increased by 9.2 percent, profits dropped 36.7 percent. Of those firms that had losses, the total losses increased by 86.2 percent.

The Auto Industry in China (2005 Jan-Nov, Unit: 1,000 cars)

  Total Cars  Over the Previous Year Passenger Cars Over the Previous Year  Commercial Cars  Over the Previous Year
 5,145  10.20%  3,523  16.40%  162.2  -1.10%
 4,138  12.10%  3,515  19.50%  162.2  -1.20%
Source: The China Association of Automobile Manufacturers (CAAM)

In 2003, China’s automobile production capacity usage rate reached 68 percent. Since 2003, many automobile factories have increased their capacity. In the first half of 2005, the automobile production capacity reached 8 million per year. It is estimated that, by the end of 2005, the capacity increased by another 2.2 million, reaching a grand total production capacity of 10.2 million automobiles per year. At the same time, factories are making investments which will cause production capacity to increase by another 10 million cars. Since the automobile production cycle usually takes more than 18 months, overinvestment in 2003 has already led to overcapacity in 2005. In 2005, China’s car production capacity usage rate already dropped to 55 percent. Since the capacity is more than the necessity, and even though in 2005 the sale of automobiles increased, due to overcapacity, the substantial increase in fixed costs has caused profits to drop. Presently, the increase in automobile production seems to have surpassed the growth in the average Chinese citizen’s ability to purchase. The result of this overcapacity of production, along with the heightened intensity of competition will, without a doubt, cause the car manufacturing industry profits to decline.{mospagebreak}

Moreover, the fact that foreign businesses are entering into the Chinese automobile industry has made competition more intense. The 51 Fortune 500 companies that have automobile production as a main sector have all set up factories in China. Presently, multinationals have become the main body of the Chinese automobile industry. This is rarely seen anywhere else in the world.

China has just stepped into the world of cars. At present, there are only an estimated 3 cars for every 100 people, far lower than the international scale of 13 cars per 100 people. As the Chinese economy grows, more and more Chinese citizens will become car-owners. In 2005, there were 35 million cars. The growth of the Chinese car industry will most probably be maintained at above the growth rate of China’s GDP. The demand for cars by the 1.3 billion Chinese citizens will increase in the future, year by year. However the Chinese car industry still has many insufficiencies in human capital, R&D, materials, technology, credit system, sales, and other areas. China will need to break through many barriers and surpass many difficulties for its auto industry to be both successful and competitive.

Mengyang Jian and Tianlun Jian are economists based in Boston.