Chinese car manufacturers heading for bubble

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Almost all Chinese automakers, including joint ventures, are rapidly increasing production capacity, but does China have the long term sales volume to continue building yet more car factories? Some would argue that the bubble is about to burst, but others appear resolute that expansion is going to last forever.

From AP:

Booming auto sales in China have spurred manufacturers to step up production so fast that concerns over “blind investment” and overcapacity in the sector are emerging, analysts said.China’s auto market overtook the United States in 2009 as the world’s largest and will remain so this year with up to 17 million vehicles expected to be sold.

The Chinese market potential remains huge in the world’s most populous nation as the percentage of people owning cars is still relatively low, analysts have said.

Sales in 2010 are expected to increase by between 25 percent and 30 percent, after a massive 46 percent surge last year, as an emerging middle class snaps up cars along with other consumer status symbols.

“At the moment, the international joint ventures just don’t have enough capacity to build all the cars they could sell,” Klaus Paur, of TNS Research International, told AFP.

“This of course triggers investment decisions,” he said, adding that much of the current growth was coming from China’s inland provinces where the potential for auto sales is the biggest.

To meet the rising demand, foreign automakers last year began announcing plans to increase their production capacity.

While gearing up to open its 10th factory in China this year, German auto giant Volkswagen also announced it will open an 11th production facility in 2013.

PSA Peugeot Citroen will boost production capacity at its joint venture plant with Dongfeng from 450,000 units to 750,000 units, while also setting up a second joint venture plant with Chinese automaker Chang’an in Shenzhen.

Since the beginning of last year, Nissan, Toyota, BMW, Hyundai, the Chinese automaker FAW and others have all announced plans to build new factories.

Local provinces and cities are also adopting numerous initiatives to encourage the expansion of production facilities.

But the pace of investment in car production has raised concerns by the National Development and Reform Commission, China’s powerful economic planning agency.

“Serious overproduction capacity will lead to negative market competitiveness, a loss in enterprise efficiency, factory stoppages and other problems,” Chen Bin, a leading commission official, told the National Business Daily while warning of “blind investment” in the sector.

Production capacity of 31 million vehicles projected for 2015 by 30 major manufacturers is nearly double current capacity, but remains lower than the total capacity projected by China’s regional governments, the commission said.

“Manufacturers in the sector think that sales will exceed 30 million vehicles in 2015, but the NDRC (the reform commission) thinks that this figure will not be reached,” said Jia Xinguang, an auto sector consultant.

TNS researcher Paur raised concerns that there will be too much capacity in two or three years “because the market may be slowing down”.

Projecting market trends is always difficult for auto makers who often need up to two years to build new plants, he added.

“It’s not the first time the government makes such an alert. It happens every three or four years,” said John Zeng, a market analyst with the consulting firm J.D. Power.

“Manufacturers are paying attention to market swings and will readjust their investment if necessary,” he said, adding that announced increases in production capacity were not always realised.