Car industry driving towards a gridlock
China may overtake the United States as the world's biggest car producer by 2020. But some analysts are predicting an alternative scenario for the mainland's vehicle industry, in which carmakers go the way of television and mobile-phone manufacturers by succumbing to massive over-production, falling prices and poor profitability.
Official forecasts show production capacity rising to 6.22 million cars next year and 14 million in 2007 - about double the most optimistic forecasts of domestic demand. Sales last year were up 37 per cent to 4.4 million units.
Foreign manufacturers and about 120 domestic producers are frantically adding manufacturing capacity to exploit what they consider as the world's last great market.
A shake-out, analysts say, is inevitable.'China has more than 100 car manufacturers, of which only the top five operate at more than 90 per cent of capacity,' said Tang Liqun, an analyst at China Automotive Industry Development Consulting in Beijing. 'Some produce no cars at all. There have been no examples of successful mergers among domestic companies.'
The mainland has also made negligible progress in building an export market for its cars. Chinese-made utility vehicles such as golf carts sell well abroad, and its cheap passenger sedans have a modest market in Africa and the Middle East. But a made-in-China tag, while fine for a television or an air-conditioner, is still something of a stigma on a car.
'China exports low-quality cars and this will not change by 2007. Our manufacturers need to do so much to improve technology and environmental standards to compete with the global players in the world market,' Mr Tang said.
Tian Yi Securities research analyst Zhu Xuedong said domestic demand was levelling off after two years of extraordinary growth.
'There is far too much investment in the vehicle industry. Production capacity will greatly exceed domestic demand,' Mr Zhu said.
Meanwhile, foreign and domestic companies continue to pour billions of dollars into new plants.
On June 7, General Motors announced that its mainland ventures would invest more than US$3 billion over the next three years to more than double capacity to 1.3 million vehicles. The same day, Geely Motors said it aimed at increasing output to one million by 2007 from 80,000 last year.
Last week, Hyundai said it would raise the capacity of its joint-venture plant in Beijing from 150,000 to 600,000 by 2008 and aimed at producing one million units in the country by 2010, helping it become one of the top five manufacturers in the world.
These investments lend weight to industry views that the mainland will become a global production base for cars, as it is now for watches, televisions and computers.
'By 2020, China will produce 15 million to 18 million cars, surpassing the US,' Zhang Xiaoyu, vice-chairman of the China Machinery Industry Federation, said in April.
Chen Qingtai, the deputy director of the State Council's Development Research Centre, said last month that annual sales of new vehicles in the country would exceed 13 million within 10 years.
The number of cars on the road would reach 57 million in 2010 and 130 million in 2020, up from 24 million last year, he added.
There are, however, several good reasons to doubt these predictions.
The first is the cost and supply of oil. Based on Mr Chen's projections, mainland cars will need 138 million tonnes of oil in 2010, or 43 per cent of national demand, increasing to 256 million tonnes and 57 per cent of total demand in 2020. In 2000, the 65.6 million tonnes of oil consumed by the country's vehicles was one-third of total demand.
Most of this oil will be imported. The impact on global petroleum prices would be enormous and possibly put fuel beyond the reach of many mainland consumers.
A second reason the forecasts are suspect is corporate profitability. Price cuts announced last month by the top three producers - Volkswagen's two joint ventures and General Motors - are expected to be matched by Ford Motor, Toyota Motor, Honda Motor, Renault, Hyundai Motor and Nissan Motor.
The surplus capacity will intensify competition and drive prices to levels lower than those on the world market, potentially forcing many companies into bankruptcy.
A third factor is the lack of physical and financial infrastructure needed to maintain mass ownership of cars - insurance, consumer finance, roads, petrol stations, repair shops and parking places.
The fourth is air pollution. Vehicle emissions account for 75 per cent of air pollution in China.
The World Bank estimates that air pollution costs, measured in health-care expenses and lost productivity from those too ill to work, are already equivalent to about 5 per cent of the mainland's gross domestic product.
The fifth is the regulatory environment. An industry policy issued on June 1 calls for a sharp reduction in the number of plants and consolidation into a handful of conglomerates that can be globally competitive.
But this has already been official policy for more than five years and dozens of small plants remain open, thanks to the support of local governments that covet the prestige, tax revenue and jobs that car factories confer.
