This year, China's automotive market demand is expected to fall short of 6 million units, while total production capacity has already reached 8 million, creating a surplus of 2 million. Moreover, there are still 2.2 million vehicles under construction. Over the next five years, an additional 8 million units of new capacity are in the pipeline. At the recent National Development and Reform Work Conference, Ma Kai, head of the National Development and Reform Commission, expressed concerns about the growing issue of overcapacity in the auto industry.
Ma Kai’s concerns are well-founded. According to a survey by the commission, there are currently 117 automobile manufacturers nationwide, but more than 90 of them produce fewer than 10,000 vehicles annually—far from achieving economies of scale. In the first ten months of this year, although the industry's cumulative output rose by 9.18% year-on-year to 461.89 million units, overall profits fell by 36.7%, and losses at unprofitable companies increased by 86.2%. The negative effects of overcapacity are now becoming evident.
To address this, the National Development and Reform Commission plans to strengthen implementation of the auto industry development policy next year. This includes tightening market access, controlling new projects, and restricting loans and land use for companies that don’t meet standards. Additionally, it has been clearly stated that newly built or expanded vehicle companies must develop their own brands and independently design products.
Concerns about overcapacity in the auto sector are not new. In 2000, officials worried that the sedan industry would struggle to meet the goals of the "Ninth Five-Year Plan," with up to 40% of capacity potentially going unused. By 2002, a report by the State Economic and Trade Commission showed that planned national car production capacity by 2005 could exceed 6.22 million, far surpassing projected demand by 3.1 to 3.3 million units. In 2003, another estimate suggested that by 2008, planned production capacity would exceed 10 million, while the most optimistic forecast for annual demand was only 6 million.
Looking back today, these numbers may seem exaggerated, but they highlight the recurring pattern of overestimating demand and underestimating supply. In fact, the auto industry completed its "Tenth Five-Year Plan" three years ahead of schedule in 2002. The 2003 forecast of 6 million annual sales by 2008 turned out to be overly optimistic, as China’s auto sales this year are expected to reach 5.5 million.
Given the uncertainties in market growth and the increasingly competitive nature of the industry, market demand plays a crucial role in balancing supply and demand. Previously, there was a belief that overcapacity wasn’t a major issue. However, when the National Development and Reform Commission listed industries with overcapacity in 2003, the auto sector was included. Yet, when the government began regulating overheated industries in 2004, the auto industry was notably excluded.
The consequences of overcapacity are now clear. Last year, the domestic auto market saw slower growth, intensified price competition, and a sharp decline in industry profits. Sustainable development is now under serious challenge. Recently, the overseas roadshow team of Dongfeng Motor Group, which successfully listed in Hong Kong, faced significant concerns from foreign investors regarding China’s auto industry overcapacity and future prospects.
To tackle this issue, both the “visible hand†of government regulation and the “invisible hand†of the market must work together. The market should play a central role. Currently, joint ventures, which account for over 70% of the passenger car market, have become more cautious in expanding production, aligning capacity more closely with demand. Private enterprises, due to investment constraints, are also more careful in scaling up. However, the blind expansion of some state-owned enterprises, driven by performance-related projects and reliant on bank loans, has drawn attention from authorities.
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