Development and Reform Commission Alerts Vehicle Overcapacity to Surpass 30 Million in 2015

In 2009, the hot scene of domestic automobile production and sales finally settled down slightly this year. The consecutive month-on-month decline in sales volume has made the domestic auto market inevitably enter the adjustment period. Although most companies did not complete half of the annual sales target in the first half of the year, car companies did not slow down the pace of capacity expansion. At present, the planned production capacity of major domestic companies has already surpassed the national automobile industry capacity planning scope.

Chen Bin, Director of the Industry Coordination Department of the National Development and Reform Commission, said at the 2010 International Forum on the Development of China's Automobile Industry held by the National Development and Reform Commission that the planning productivity of the local auto industry for 2015 will be far more than 30 major domestic auto companies in 2015. The planning figure of 31.24 million capacity shows signs of overcapacity.

Local government planning is too high

With the early experience of making mistakes in the domestic market in early 2009 that led to large-scale shortages, coupled with over-optimistic estimates of the domestic auto market, accelerating capacity expansion has become the consensus of major auto companies. Since last year, Dongfeng Nissan, BMW Brilliance, FAW-Volkswagen, FAW-Toyota, Beijing Hyundai and FAW Car have all announced that they will build new factories to ease the negative impact of insufficient production capacity on sales.

Chen Bin said that according to the National Development and Reform Commission’s capacity planning for auto companies across the country, the auto industry has already shown signs of overcapacity. According to the results of a survey of 20 auto companies and 10 automakers in China, the planned production capacity of domestic auto companies in 2015 was 31.24 million, and the local automaker's production capacity in the late 12th Five-Year Plan has far exceeded Corporate planning figures.

"The reason for the overcapacity may be the failure of market signals. It is difficult for enterprises to accurately forecast market demand and lead to blind investment behavior. Severe excess capacity will lead to vicious competition in the market, decline in corporate economic efficiency, and a shortage of factories. It will seriously impede the healthy and sustainable development of the auto industry and even adversely affect the macroeconomic development, Chen Bin said.

For the NDRC’s warning on overcapacity, companies are cautious. Liu Zhigang, President of Huatai Automobile, said in an interview with the reporter of “Daily Economic News” that the NDRC only disclosed the current situation of overcapacity in the entire industry, and disclosed the policy orientation of regulating production capacity, but it is not necessarily implemented immediately, and the company still has to rely on its own Situation and understanding of the market to formulate and adjust strategies to determine long-term development strategies.

Industry Perspective Game

Compared with the NDRC's signal to regulate production capacity, experts from industry associations and relevant departments are relatively optimistic about overcapacity. The prevailing view is that the rapid development of domestic autos should offset the pressure brought by excess production capacity. Even if there is a short-term low sales period, companies will promptly adjust their own circumstances.

Xu Changming, director of the Information Resources Development Department of the National Information Center, said in an interview with reporters that despite the structural slowdown in the auto industry, there is no need to worry too much about overcapacity. “The domestic auto market is still in a stage of rapid development. Even without any policy stimulus, the whole industry should be able to maintain an increase of about 15%. The current capacity utilization rate is higher than 75%. Even if adjustments occur, it will take one to two years. The time is quickly digested."

“The most worrying factor is that state-owned auto companies have been forced to expand their production capacity due to administrative pressure and have no time to care for demand, but joint ventures and self-owned brands that account for more than 70% of the domestic auto market have strong self-adjustment capabilities,” said Xu Changming. The National Development and Reform Commission did not control cars in industries with excess capacity, but issued warning signals. It should only be a strategic consideration and there is no need to worry about overcapacity.

Dong Yang, executive vice president and secretary general of the China Association of Automobile Manufacturers, and Xu Changming share the same view. He believes that there is no need to worry too much about overcapacity. The NDRC's focus on industry capacity is its responsibility. However, previous concerns about overcapacity have disappeared with the market's redness. I hope this is no exception.

Zhang Xiaoyun, vice president of the China Federation of Machinery Industry, also believes that the NDRC is only issuing early warning signs of overcapacity, but it is believed that in the current fully competitive market, the company's expansion of production capacity is more out of its own needs and will not be blindly invested.

Invalid productivity measures

“Overcapacity is in progress every day, but many times the market estimates are still too conservative. Beijing Auto Group is currently facing a serious shortage of production capacity, and will significantly increase production capacity during the 'Twelfth Five-year Plan' period.” General Manager, Beijing Automotive Wang Dachi told the reporter of "Daily Economic News".

In fact, Wang Da-chiang's point of view points out a major problem in the domestic auto industry at present - insufficient effective capacity and inefficient production capacity. For Beijing Hyundai, Dongfeng Nissan, and FAW-Volkswagen, which have achieved outstanding sales, production capacity has become an embarrassment for the further development of the company.

Gong Xingbo, director of Public Relations Department of FAW-Volkswagen Public Relations, said in an interview with the reporter of “Daily Economic News” that FAW-Volkswagen’s current inventory rate is the lowest in the industry and the current production capacity cannot meet the needs of the market in a timely manner. Once the FAW-Volkswagen Foshan factory is completed, it will Will greatly ease the production pressure of FAW-Volkswagen.

However, not all companies' products are as popular as FAW-Volkswagen. Some small companies can only rely on “plagiarism” or mergers and reorganizations to pursue their own development, and some of their production capacity is in surplus.

Industry insiders pointed out that the inefficient production capacity surplus and local government's pursuit of overheating in the auto industry is the main reason for the NDRC to issue early warnings. Therefore, the exit mechanism of enterprises should be further improved.

According to Mr. He Guangyuan, former Minister of Machinery Industry, the overcapacity has to be viewed in two aspects. On the one hand, for the well-to-market brands but the enterprises with insufficient capacity to encourage their expansion, the ineffective production capacity must be controlled; the local government is too optimistic about the auto industry. The introduction of low-cost land and capital policies to attract auto companies but lack of planning should cause sufficient vigilance.

"My proposal is to have a strict approval procedure for new projects in the automotive industry. We must not blindly build factories and go ahead with it," said He Guangyuan.