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Visitors look at cars during the 18th Shanghai International Automobile Industry Exhibition in Shanghai, April 16, 2019. Photo: Xinhua

What kind of stimulus do China’s half-idle car assemblies need to restart stalled sales in the world’s largest vehicle market?

  • China has the installed capacity to produce 64 million vehicles a year, more than double the cars, trucks and vans sold in 2018 in the world’s largest automotive market
  • One in six of the country’s 800 million-strong workforce is employed in an industry directly or indirectly related to the automotive industry

Word got around last week – while the Auto Shanghai 2019 trade show was in full swing – that China’s economic planning agency was mulling an easier process for drivers to obtain licences in the world’s largest vehicle market.

The speculation sent the share prices of carmakers soaring, on hopes that the liberalised procedure would spur drivers to become owners, help clear out showrooms and stem nine consecutive months of declining sales. At least three automotive stocks jumped by their 10 per cent daily limit.

The jubilation underscored the lingering concern in China that three decades of profligate investment had flooded the country with enough assemblies and factories to turn out 64 million cars a year, more than double what was actually sold in 2018. The automotive industry, operating at 43 per cent of capacity, is a ticking time bomb with the potential to hurt one in every six of China’s workforce if it blows up, according to observers.

“The most severe challenge facing China’s auto industry is not consumer demand, but the supply side,” said Paul Gong, a UBS analyst. “As every carmaker expands production capacity at a faster pace than demand, the fiercer competition will eventually affect the business and eat into the profit margin.”

For three decades, carmakers and policymakers didn’t give excess capacity a second thought as the Chinese economy expanded at an average annual clip of 9.5 per cent. A middle class had sprouted where a classless proletariat once stood, bringing along with it such affectations as owners who would upgrade to a new car model every six years on average.

That was a boon for the world’s vehicle manufacturers, as 1.4 billion Chinese consumers held the growth potential to offset saturated markets in North America, Europe and Japan. Every major carmaker from Motown to Wolfsburg and Nagoya made a beeline for China, typically investing US$2 billion with a local partner to open a factory and establish a distribution network.

Carmakers just could not produce vehicles quickly enough to meet demand. Three months on a waiting list was considered intolerable, and eager buyers would put down the equivalent of 15 per cent of their choice model’s value to get to the top of the list.

In 2018, the industrial output from China’s vehicle manufacturers topped 8.05 trillion yuan (US$1.2 trillion), or 9.4 per cent of the entire country’s gross domestic product. One in every six of China’s 800 million-strong workforce is involved in an industry related to automobiles, according to estimates.

In 2009, three decades after private car ownership was first permitted, China overtook the United States in the wake of the Global Financial Crisis to become the largest vehicle market on earth, with 13.6 million cars, vans and trucks sold. Less than a decade later, China’s 2018 vehicle sales had more than doubled to 28.1 million units.

China’s economic growth lost pace after reaching a peak in 2007. The year-long US-China trade war cast a pall over prospects, adding to the economic woes for the consumer industry.

As job prospects dimmed and pay rises were harder to come by, that shiny new car in the showroom looked less affordable all of a sudden, deterring households from committing to the biggest-ticket purchase after real estate.

China’s car sales declined last year for the first time since 1992. Sales fell 6.9 per cent in March from a year ago to 2.02 million cars, as the US-China trade war showed no sign of abating.

Some Chinese carmakers like Li Shufu’s Zhejiang Geely Holding Group, state-owned Chery Automobile and SAIC Motor had been searching for export markets to counterbalance declining sales at home.

Most of the Chinese vehicle exports are found in emerging markets in Africa, Eastern Europe, the Middle East and Southeast Asia. China does not export many finished cars to the US, selling just 51,062 last year valued at US$1.3 billion, according to data compiled by the US Commerce Department’s International Trade Administration.

The excess capacity now permeating the industry could potentially threaten the country’s economy and financial system as the billions of dollars worth of redundant facilities add to non-performing loans and job losses.

Nissan unveiling the latest generation of its Sylphy during the Auto Shanghai 2019 show on Tuesday, April 16. Photo: AP
Nissan Motor would count its blessings amid the industry’s gloom. The Japanese carmaker’s venture in China with Dongfeng Automobile sold 1.3 million vehicles last year, exceeding its production capacity of 1.25 million units. The venture posted a 3.4 per cent year-on-year sales rise for the first quarter of 2019.

“We think we will see a recovery in the second half of this year [in China],” Nissan’s senior vice-president Makoto Uchida said during Auto Shanghai 2019, the biggest trade fair in the world’s largest vehicle market. “The most important thing for us is to make sure that we see month-on-month growth.”

The situation is less sanguine among other carmakers. Ford Motor’s venture with state-owned Changan Automobile has the capacity to assemble 1.6 million vehicles a year, but sold only 377,000 last year, leaving three quarters of the assembly’s capacity idle. The carmaker had to lay off assembly contractors because of weak sales.

Ford was a latecomer to China, lagging behind General Motors and Volkswagen in setting up local assemblies. It opened its first China plant in 2003 and has struggled to keep up ever since. The last time its venture with Changan made it anywhere among China’s 10 bestselling models was in December 2017, when it sold 33,600 units of the Ford Escort, a 9 per cent growth over the preceding month, according to the China Association of Automobile Manufacturers.

To turn its business around, Ford hired Chen Anning from Chery Automobile in November 2018, and the new chief executive drove the 115-year old inventor of mass industrial production to embrace new energy vehicles (EVs). Ten of the 30 new models that Ford plans to unveil in China over the next three years will be EVs that run on electric battery packs, Chen said.

“We are confident that with our business transformation, we will grow in our understanding of Chinese consumers, enabling us to launch more competitive vehicles and services at China speed,” Chen said on April 3. “We are in the course of turning the [business] around.”

Infographics: The stones in the road for China’s 2025 plan on electric vehicles

Ford’s EV push adds to a crowded field of 486 licensed EV manufacturers, more than triple the number that existed two years ago.

At one extreme are the carmakers switching from internal combustion engines to battery packs, while at the other sits a group of technology start-ups who had never previously spent a day in car-making. They are all vying for government subsidies to stake a claim in the future of the automotive industry.

While China’s EV sales are projected to reach a record 1.6 million units this year, that’s unlikely to be enough to keep all those assembly lines humming, prompting warnings that the ballooning EV market could burst and leave behind only a few survivors.

On a construction site at Lingang, 70 kilometres from the famous Shanghai Bund, workers are toiling around the clock to complete a US$2 billion assembly plant for Elon Musk, which would see 250,000 Tesla electric vehicles roll out of the Gigafactory’s gates by 2021.

Tesla CEO Elon Musk at the groundbreaking ceremony of his Gigafactory in Shanghai on January 7, 2019. Photo: Reuters

Weighed down by the dismal state of the overall automotive industry and weak sentiment, EV sales growth had slowed to 68 per cent in the second half of last year, half the pace of the 106 per cent seen during the first half, according to data from research house EV-Volumes.

BYD Company, the battery maker that transformed itself into China’s biggest EV maker, counting Warren Buffett among its shareholders, knows the herd mentality only too well.

“China’s carmaking industry is at a crossroads where the old growth drivers will be replaced by new ones,” the Shenzhen-based company’s founder and chairman Wang Chuanfu said last week at Auto Shanghai. “It is time for the overall industry to chase quality of growth.”

BYD’s e-SEED GT concept electric vehicle on display during the Shanghai Auto show on April 16, 2019. Photo: Reuters

Last month, Beijing announced it would slash subsidies on electric cars by up to 60 per cent, part of efforts to improve the overall technological standards of the new-energy vehicle industry and expel some smaller underachievers.

Without subsidies for buyers, the EV makers will have to raise the prices of their products by at least 20,000 yuan a piece to offset the production costs, which is set to cause a drop in sales as consumers balk at the heightened prices.

The National Development and Reform Commission (NDRC), the economic planning agency, said in a statement late on Thursday that it was seeking public feedback on its plan to ease restrictions for stimulating consumer demand in a range of products from cars to appliances.

The stimulus couldn’t have come at a more opportune moment.

“Some small players had already felt the pressure since last year, as investors, particularly those backed by the Chinese government, became more cautious in investing, as trade war concern deepens,” said He Xiaopeng, founder and chairman of China’s emerging EV brand XPeng.

“Things will be tougher this year, and a watershed for this industry will come by the end of 2020.”

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