The overcapacity in China's automotive industry is largely driven by local protectionism. Local governments often promote car manufacturing not only to boost GDP but also to create jobs, leading to an overexpansion of production capacity. This issue has raised concerns for the third time in recent years, signaling a growing need for regulation.
On December 21, 2005, during a press conference held by the State Council Information Office, Liu Zhi from the National Development and Reform Commission (NDRC) highlighted that several industries, including automobiles, had excessive production capacity. This warning was echoed a month later when Chen Qingtai, a researcher at the State Council’s Development Research Center, revealed that the utilization rate of China’s auto production capacity was just 55%, according to NDRC data.
At that time, domestic automakers had an annual capacity of 8 million vehicles, with 2.2 million more under construction. However, market sales only reached 5.5 million, resulting in a low utilization rate. The revelation sparked widespread discussion, as it suggested that the industry was significantly overbuilt.
By December 3, 2005, Ma Kai, head of the NDRC, confirmed that there was a surplus of 2 million vehicles in the auto industry, with new capacity planned for up to 8 million units. Industry insiders noted that the tone on overcapacity had been set earlier in November 2005, though it was initially kept confidential before being publicly acknowledged by high-level officials.
Despite the official warnings, some industry leaders questioned the accuracy of the data. Zhu Ronghua, vice president of Changan Group, argued that the reported overcapacity might be exaggerated, suggesting that the figures were inflated by companies using the auto industry as a way to secure land and boost local economic growth.
Gao Xu of McKinsey & Co. explained that the reported production capacity often does not reflect actual performance due to inconsistencies between different stages of the manufacturing process. Meanwhile, Chen Guangzu, a senior automotive expert, acknowledged that some overcapacity is normal, as part of the natural cycle of industry development and technological obsolescence.
In 2005, many major automakers operated below 60% capacity. FAW-Volkswagen, for example, had a utilization rate as low as 49%. By the end of the “Eleventh Five-Year Plan,†the NDRC warned that auto production capacity would exceed demand by more than double, with about 10 million vehicles at risk of being unused.
With 28 provinces reporting automotive projects, the problem of overcapacity continued to grow. Experts like Chen Guangzu stressed that while overcapacity is a real issue, it needs to be managed carefully rather than simply eliminated. He pointed out that local protectionism played a key role in driving unnecessary expansion, as it served both economic and employment goals.
Although international firms like Morgan Stanley and Goldman Sachs raised concerns about overcapacity as early as 2004, Chinese authorities were slow to acknowledge the problem. The NDRC did not include the auto industry on its list of overheated sectors until 2005, despite clear signs of overinvestment.
By 2005, the auto sector had already begun to cool down after years of rapid growth. Reports from Morgan Stanley and Ernst & Young suggested that the utilization rate was even lower than previously estimated, highlighting the urgency of addressing the overcapacity issue. As the industry faces mounting pressure, the challenge remains how to guide this massive production capacity toward sustainable development.
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