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Is there overcapacity in China's auto sector?
I got a phone call the other day from a friend of mine. With many automakers expanding output this year, he was concerned about overcapacity in China's auto industry.
"Well, even if the industry has already got some excess capacity, it is not necessarily a bad thing," I told him.
And this is why I believe so.
First, with demand still so strong, it is hard to find any oversupply on the market this year.
According to the China Association of Automobile Manufacturers, auto sales nationwide reached 9.7 million units in the first nine months of 2009. The figure represented growth of 34.2 percent from a year earlier and was also higher than last year's total sales of 9.4 million units.
To meet unexpectedly strong demand, most automakers in China these days are adding extra shifts to increase output.
But what about next year?
True, several international automakers such as Ford and Volkswagen, and nearly all local players are building new facilities in China.
Also, few would expect today's robust sales growth, spurred by the 50 percent purchase tax cut for small cars implemented at the beginning of the year, to be sustained far into 2010.
But fortunately China's economy is picking up – the GDP growth in the third quarter of this year is widely expected to reach 9 percent, up from 7.9 percent in the second quarter.
And the auto market here still has tremendous potential. Deloitte, a consultancy, estimates China's average car ownership rate is 23 units for 1,000 people, considerably below the world average.
That means although the industry's capacity utilization ratio will fall slightly, prospects for the market here will remain strong.
"But strictly speaking, once the utilization ratio declines, the industry will soon end up with a capacity glut," my friend said.
That's a good point. Some research companies here estimate the industry's average capacity utilization ratio could drop to below 70 percent next year.
But again, some surplus capacity on as young and fast growing auto market as China is not necessarily a bad thing,
It will trigger the consolidation needed to weed out weak players.
In the end, for the industry as a whole, that can be no bad thing.
"Well, even if the industry has already got some excess capacity, it is not necessarily a bad thing," I told him.
And this is why I believe so.
First, with demand still so strong, it is hard to find any oversupply on the market this year.
According to the China Association of Automobile Manufacturers, auto sales nationwide reached 9.7 million units in the first nine months of 2009. The figure represented growth of 34.2 percent from a year earlier and was also higher than last year's total sales of 9.4 million units.
To meet unexpectedly strong demand, most automakers in China these days are adding extra shifts to increase output.
But what about next year?
True, several international automakers such as Ford and Volkswagen, and nearly all local players are building new facilities in China.
Also, few would expect today's robust sales growth, spurred by the 50 percent purchase tax cut for small cars implemented at the beginning of the year, to be sustained far into 2010.
But fortunately China's economy is picking up – the GDP growth in the third quarter of this year is widely expected to reach 9 percent, up from 7.9 percent in the second quarter.
And the auto market here still has tremendous potential. Deloitte, a consultancy, estimates China's average car ownership rate is 23 units for 1,000 people, considerably below the world average.
That means although the industry's capacity utilization ratio will fall slightly, prospects for the market here will remain strong.
"But strictly speaking, once the utilization ratio declines, the industry will soon end up with a capacity glut," my friend said.
That's a good point. Some research companies here estimate the industry's average capacity utilization ratio could drop to below 70 percent next year.
But again, some surplus capacity on as young and fast growing auto market as China is not necessarily a bad thing,
It will trigger the consolidation needed to weed out weak players.
In the end, for the industry as a whole, that can be no bad thing.
