China to Cut Back on Car Production Growth Targets

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Now that’s not a headline we have come to expect from the Asian powerhouse. China’s car production growth has been nothing short of meteoric over the last three years.

Source: CAAM

As this graph shows, since the 2008-09 financial crisis a combination of loose money and government stimulus incentives have pushed China’s car production capacity to become the largest in the world.

But that could all be about to change, according a NY Times article reporting on announcements made by a succession of government officials this month. The call is for China’s automakers to shift from growth to producing more fuel-efficient cars and more advanced designs. Within the confines of this change in policy, the recent decision by Beijing to limit the number of new cars that can be registered in the city could be a template for other Chinese cities, all of which suffer from similar overcrowding problems.

China’s breakneck growth in car production had until now been taken largely as a foregone conclusion. JD Power & Associates estimated just last month that China would have manufacturing capacity sufficient for 31 million cars a year by 2013 as sales increased 33 percent from 2009 to 2010, spurring massive investment in new production lines. Although export sales have surged 57 percent in the first seven months of this year, at just 800,000 vehicles according to business-forum-china, export markets are starting from too low a base to absorb the massive increases in capacity due to come on-stream. Even so, Beijing it seems is not keen to encourage exports yet, saying quality needs to improve markedly before large-scale exports will be permitted. The authorities fear large-scale exports of autos with significantly poorer quality than foreign makers will damage the country’s long-term brand image, as it did for South Korea, resulting in the need to impose hugely expensive industry-leading warranties in order to counter the early failings.

Although Beijing accounts for only 4 percent of total domestic car sales by region, the near 70-percent cut in new car registrations is a dangerous precedent for other cities if the authorities decide to pressure the provinces to follow their lead. How successful they would be remains unclear, as the NYT says many automakers are partly or entirely owned by municipal or provincial governments, who will not be keen to limit local employment prospects or economic growth.

Attempts by Beijing to encourage electric vehicles have largely been an abject failure so far. Even a 123,000-Renminbi ($19,300) local subsidy has resulted in almost zero sales, prompting Beijing to consider yet stricter fuel economy standards by 2015, in order to reduce oil imports and add a spur to hybrid and all EV cars.

The biggest shock could be to Western automakers that have seen rapidly rising Chinese car sales, the profits of which save them from depressed markets at home. If sales stall in China over the next two years, it is difficult to see where significant growth will come from in a global market already characterized by over-capacity.

–Stuart Burns

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