Less than 60% of overcapacity in the auto industry

The overcapacity in China's auto industry is largely driven by local protectionism. Local governments often push for car production as it boosts GDP and creates jobs, even if the market doesn't support such expansion. This has led to a growing concern about the industry’s sustainability. This is the third time the alarm over overcapacity has been raised in the automotive sector. On December 21, 2005, Liu Zhi from the National Development and Reform Commission (NDRC) highlighted that industries like steel, aluminum, and automobiles suffer from excessive capacity. Just weeks earlier, on November 28, Chen Qingtai, a researcher at the State Council’s Development Research Center, revealed that China’s auto capacity utilization rate was only 55%, according to NDRC data. According to these figures, the domestic auto industry has an annual production capacity of 8 million vehicles, with another 2.2 million under construction. However, actual sales only reached 5.5 million that year, resulting in a 55% utilization rate. The statement caused widespread discussion, and insiders believe that Chen’s remarks reflected official concerns. By December 3, 2005, Ma Kai, head of the NDRC, confirmed that the auto industry had 2 million units of excess capacity, with more projects in the pipeline, potentially reaching 8 million. Industry insiders noted that the “overcapacity” issue was first mentioned at a closed-door meeting in November 2005, but it wasn’t made public until officials like Chen Qingtai, Ma Kai, and Liu Zhi spoke out. There are three main illusions surrounding the overcapacity narrative. Zhu Ronghua, vice president of Changan Group, questioned the accuracy of the data, suggesting that it could be off by up to 70%. He pointed out that many companies inflate their reported capacities, using car manufacturing as a way to secure land and boost local economic indicators. Some factories were never built, yet the capacity was still recorded. Industry experts also noted that companies often report two shifts of production—251 days a year, 16 hours per day. Some may even report three shifts, further inflating numbers. Gao Xu of McKinsey explained that auto production is divided into four stages: stamping, welding, painting, and assembly. Each stage has different capacities, and the overall output is limited by the weakest link. While some experts agree there is overcapacity, they argue that a certain level is normal due to equipment depreciation and obsolescence. In 2004, among over 100 auto companies, most sold fewer than 10,000 units annually, while only five exceeded 500,000. Many smaller manufacturers struggled with low sales. By 2005, the average capacity utilization rate among top automakers was below 60%, with FAW-Volkswagen at just 49%. At the 2006 Industry Development Report Meeting, Chen Bin of the NDRC warned that by the end of the “Eleventh Five-Year Plan,” auto production capacity would exceed demand by more than double, risking a massive oversupply. With 28 provinces reporting auto projects, the problem is widespread. Experts suggest that rather than simply cutting capacity, the government needs to guide investment more effectively. As Chen Guangzu noted, the real issue is local protectionism, which prioritizes short-term economic gains over long-term stability. Despite repeated warnings from both domestic and international analysts, Chinese authorities were slow to acknowledge the problem. In 2004, Morgan Stanley and Goldman Sachs raised concerns, but the NDRC did not classify the auto industry as overheated. This was partly because the central government controlled auto project approvals, unlike other sectors like steel or cement, where local governments had more autonomy. However, by 2005, the situation became clear. The auto industry, once seen as a high-growth sector, suddenly faced a slowdown. Morgan Stanley estimated utilization rates below 60%, while Ernst & Young suggested that not all planned projects would come to fruition, reducing the risk of a full-blown crisis. Still, the overcapacity issue remains a pressing challenge for China’s auto industry.

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