Commercial Vehicle Overcapacity at Catastrophic Levels.
Overcapacity weakened the US auto industry before the Financial Crisis, and destroyed it during the crisis, with two of the Big Three automakers, some of the biggest component makers, and numerous smaller component makers going bankrupt. It was during the bankruptcy process that the industry restructured, laid of hundreds of thousands of people, shuttered and shed plants, mauled creditors, destroyed stockholders, and finally got rid of overcapacity.
Overcapacity is devastating to the industry, employees, investors, and creditors. But it feels good on the way up.
And now the Chinese auto industry has that problem. The automakers active in China, including all global brands, have had no patience with doubters, and announcements of new assembly plants being built in different parts of China became a near weekly ritual.
China went from automotive backwater to the largest auto market in the world, blowing past the US in the process, within a decade. Last year, 24.6 million vehicles were sold in China, and no one was going to stop this blistering rate of growth, not even the slowing economy.
The industry has become a huge contributor to the Chinese economy, not only in manufacturing, but also investment (building and equipping plants, dealerships, distribution infrastructure, etc.), services such as finance and insurance, transportation (hauling 24.6 million vehicles across China), etc. It’s for this reason that the industry is sacred.
So when sales began to sag last year, the government threw all kinds of subsidies at it to keep growth alive no matter what, and sales perked up again. In the first four months this year, sales rose 6.1% compared to the same period in 2015, a far cry from the double-digit growth of prior years.
Yet automakers kept building plants, and production capacity kept soaring far faster than sales. By last year, China had the capacity to build 31.2 million vehicles. And idle capacity – the bane of the industry – is now rising; and in the case of commercial vehicles, an indicator for the good-producing economy, overcapacity is soaring.
It’s getting so serious that it isn’t just some wayward bloggers pointing it out, against momentous industry hype and promises, but the Chinese government via its National Development and Reform Commission (NDRC) and the China Association of Automobile Manufacturers CAAM). According to Reuters, they made their concerns known in a joint statement at a press conference in Beijing.
New assembly plants in the pipeline will add another 6 million units in production capacity, they explained. With this, production capacity will rise to 37.2 million units.
Passenger vehicle capacity is currently running at what it termed a “relatively reasonable” 81% utilization rate, while for commercial vehicle production, capacity utilization has already plunged to a catastrophic 52%.
They jointly warned that the overcapacity problem will worsen. The plants currently under construction were planned back in the day when auto sales in China were still soaring at double-digit rates, and a slowdown simply wasn’t part of the scenario.
The NDRC and CAAM statement warned that the auto industry, as Reuters put it, “must strengthen development and commercialization of new products and technologies.” The industry must also raise production capacity utilization, that is lower overcapacity, which is the hard part, because they would have to sell more vehicles or remove some production capacity. And they must “launch cooperation in international production,” whatever that means, perhaps boosting exports, which have been crashing for the past few years.
The statement direct industry players what to do to “avoid a production glut,” as Reuters put it, though “avoid” may be a misnomer and hopelessly optimistic word since the “production glut” is already building:
“First, as commercial vehicle capacity utilization is low, it is not appropriate to blindly increase investments in production capacity,” the two bodies said.
“Secondly, investment in the battery space is hot, while companies are fragmented and technology and development levels are uneven. We must guard against low-level redundant investments.”
This sort of structural overcapacity runs up the supply chain, impacting plants from automakers down to the smallest component maker. It doesn’t go away on its own, unless sales suddenly begin to soar even faster than capacity additions. And the catastrophic overcapacity in the commercial vehicle sector points at deeper problems, in that these companies have totally overestimated the growth of China’s goods-producing and transportation-based economy. And that’s another data point for the hard-landing gurus.
China’s economy and its role as economic engine of the world may be getting shakier, according to the Chinese government. Don’t count on us to pull, it said. Read… Chinese Government Warns World of “L-Shaped Path”: a Dive & No Recovery
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