Divergence in output, sales prompts supply glut concerns
Experts on Sunday called for more effective measures from the government, especially structural reforms, to tackle a potential overcapacity issue in the nation's auto industry, as signs of an excess in car production have emerged in recent years.
Though officials have acknowledged concerns on overcapacity, initial efforts to address the issue, including boosting cars sales through incentives and reducing vehicle production by limiting new investments in production capacity, are insufficient, experts said, noting structural reforms are needed.
A supply glut is already building in the world's largest auto market, as production capacity continues to rise, despite slowing sales, pointing to concerns that overcapacity is an unavoidable problem, if not properly addressed, according to experts.
And the overcapacity issue looks even more dire for the next few years, according to a news article posted on the website of the China Association of Automobile (CAAM) on Thursday. The article, citing analysts, estimated that production capacity would reach 50 million cars in 2020, while sales is expected to only grow to 31 million.
"If the industry is not guided to develop in an orderly fashion… there will be a serious overcapacity," the article reads, noting overcapacity issues in commercial vehicles is already on vivid display, with prices for trucks dropping significantly.
The unbridled production capacity is the result from earlier expansion investments made by car companies, when car sales were still growing at double-digit rates, according to the article.
But the growth rate has slowed to 8.1 percent, which translates into sales of 12.83 million cars, in the first half of this year, with the CAAM forecasting a 6 percent growth rate for 2016.
In a joint statement released on May 11, the National Development and Reform Commission (NDRC), the top economic planner, and the CAAM, warned the emergence of structural overcapacity.
"As our country's economy enters a 'new normal', the growth rate of the auto market is noticeably slowing and the issue of structural overcapacity in the auto industry has emerged, which needs the attention of relevant parities," read the statement posted on the NDRC's website.
Although the utilization rate of passenger cars stood at 81 percent in 2015, a "relatively reasonable" rate, commercial vehicles such as trucks and buses are not fully utilized, with the utilization rate staying at 49 percent and 56 percent, respectively, the statement said.
Structural reform
Analysts on Sunday said regulators need to do more to guide the industry out of overcapacity, but warned that seemingly "impossible difficulties" lie ahead.
"If there is an overcapacity issue, who caused it? who is responsible for it? The problem is definitely in the regulatory system," Zhang Yu, managing director of the Automotive Foresight (Shanghai) Co, told the Global Times on Sunday, while noting the problem is not as bad as some suggest.
Zhang said an approval-based regulatory system has propelled the number of permits issued to producers with low efficiency, which contributes to uncoordinated and redundant production capacity.
And to prevent overcapacity, regulators need to guide such producers to bankruptcy or mergers with larger companies, but, without structural reform, "that is an almost impossible" task because of resistance from some local governments to give up auto industry as their main source of economic growth, Zhang said.
Wu Shuocheng, a Shanghai-based independent industry analysts also said that overall overcapacity issue in the Chinese auto industry is "relative not absolute," noting that the market is strong and the utilization rate is not "too low."
"When we talk about overcapacity, we are talking about backward capacity, not effective capacity, and certainly, officials have concerns of growing backward capacity," Wu told the Global Times on Sunday.
And to cut backward production, regulators need to carry out structural reforms that would improve the ability to set higher standards for production and enforce them, while ensuring market forces play a more divisive role, Wu said, adding previous measures to limit vehicle production has not stopped capacity expansion.
In an effort to contain potential overcapacity, the government has taken measures which include reducing approval of permits for new vehicle production, while trying to expand sales by offering incentives to rural residents for car purchases.
The NDRC and the CAAM, in their statement, urged companies to avoid "blindingly" adding investment and to pursue new technologies, consolidation of resources and international capacity cooperation.
