India Capacity Glut gives Clues to China’s Future

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India has often been painted as the ‘next China’ in terms of auto sales, the sub continents auto sales reached new highs during 2009-2010 but sales slowed slightly in 2011 which has Reuters in a flap over a potential capacity glut. India runs on a slightly different method to the rest of the world, with its annual car sales methodology running on a March to March basis rather than a January to December system. High interest rates are being blamed for a potential drop in sales for the first time since 2002, however January sales were up 7.2% which shows there is some play in the market, but analysts say that the market is still heading to miss early projections:

Annual car sales in India are likely to drop for the first time since 2002 in the fiscal year ending March after January sales fell short of expectations, an industry body said.

Car sales, which grew 30 percent in the year ending March 2011, posted their first monthly fall in three years last July as high financing and running costs deterred buyers.

“The car industry is too sensitive to interest rates, and we don’t see interest rates coming down quickly,” Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers (SIAM), told reporters on Wednesday.

“Unless sales grow in February-March at 10 to 12 percent, which is unlikely, the industry will miss the sales projection,” he said, referring to its forecast for zero to 2 percent growth.

Now onto the over capacity issue:

Lured by 30 percent sales growth over the past two fiscal years, carmakers have pledged $6 billion to almost double India’s annual production to more than 6 million vehicles. But now sales growth has come to a screeching halt and production capacity could be as much as 40 percent more than demand.

In September 2010, Maruti Suzuki (MRTI.NS), the industry’s biggest player in India, announced a $390 million investment to expand capacity by 250,000 cars a year. It looked like a smart move then.

Indians bought 2.5 million cars in the fiscal year that ended in March 2011, an increase of 63 percent — or 1 million cars — over two years. Global majors like General Motors (GM.N), Toyota (7203.T) and Peugeot (PEUP.PA) soon followed. But the sales boom didn’t last.

Car sales will likely shrink in the current fiscal year, for the first time in 10 years, leaving an excess capacity of around 1 million cars that the industry says will lead to falling utilization or a profit-eroding price war.

“If everybody comes along with what they say they are going to do, we are definitely going to have serious surplus capacity,” said Maruti’s chairman, R.C. Bhargava.

“With more manufacturers coming, everyone will have to work with thinner margins,” Bhargava said, adding that capacity could be 30 to 40 percent higher than demand in the next few years

China has arguably already gone through the price war era with manufacturers on a race to the bottom by producing ever cheaper cars on ever reducing margins which only hurts the companies bottom line, with less profit they have less to reinvest in R&D which becomes a trap that’s hard to get out of. Chinese manufacturers have been able to fight back with increasingly improved vehicles but foreign dominance of the Chinese auto market persists, Chinese manufacturers are now betting big on exports to keep their factories turning over in 2012 and beyond. During boom years from 2009-2010 Chinese and foreign automakers expanded their capacity in China to new levels, but these new factories have been running at less than full capacity in many instances and are indicative of a potential Indian style capacity glut if domestic and export sales do not pick up as planned.