China, the world’s 2nd largest auto market had grown 25% since last year, reaching 6.45 million vehicles in the first 11 months of 2006. With such a huge market to tap, it is obvious that investors would be setting their eyes on the China auto market. But not all is well. China’s National Development and Reform Commission, the nation’s economic planner announced plans to curb the Chinese automotive industry’s rapid expansion which is resulting in overcapacity, something which is not a good thing as profitability will suffer due to underutilization of plants, amongst other negative effects.
While the government had been actively promoting the growth of the Chinese automotive industry as one of it’s ways to stimulate the economy for the past 10 years, growth had gone out of control and had started to become wasteful. Total combined output capacity of all the factories in China is currently at 8 million units a year, and another 2.2 million units of capacity is already under construction. These factories mostly belong to global auto giants like GM and Toyota. Following current trends, total capacity is expected to hit 20 million cars per annum in 2010, much much higher than the predicted sales of only 9 million units in the same time period.
New rules have been put in place:
1) Sales of vehicle makers applying for government approval to establish new plants outside their home bases must have exceeded 80 percent of their total production capacity in the previous year.
2) Companies which are considering the creation of a second car plant must have sold at least 100,000 cars. Minimum sales targets for SUV, multi-purpose vehicles, trucks, vans and buses were also given.
While the government had already realized this earlier and issued decrees to try to slow down the growth previously, being typical businessmen the smart automakers have found ways to bend the rules. These new rules were designed to further curb growth, for the good of the industry.