Bloomberg BusinessWeek reports that both domestic and foreign-based auto producers continue to build and subsequently bring online more auto production capacity across China. The report cites a projection that by 2017 there will be 140 auto production plants in China vs. the 123 existing at the end of 2014. The problem, however, is that China’s nationwide domestic auto consumption is far short of this capacity indicating that overcapacity is expected to worsen. Cited is an IHS Automotive chart indicating that China’s excess capacity has jumped 83 percent in the last two years. The article cites a JSC Automotive forecast that by 2017, auto plants across China will be able to produce 11.4 million more cars than are expected to be sold.
The report cites one Shanghai based consultant as indicating that some carmakers are regretting plans to expand plant capacities, but decisions have already been made. Once more, as Supply Chain Matters readers all well aware, China’s domestic market remains an open opportunity for future growth, but the continued battleground pits China’s domestic brands against foreign based nameplates. The obvious consequence is that there is not enough product demand to sustain all manufacturers, and that has the potential for industry consequences.
Production overcapacity is a common problem in China in many industry and commodity sectors and the results have been messy or sometimes ugly consequences. An ongoing overcapacity condition remains for the production of steel. According to Bloomberg, already, car dealerships across China are seeking more financial assistance and lower sales volume targets. China’s domestic consumers will obviously gain more buyer benefits over time.
Europe’s automotive industry has a similar overcapacity challenge since prior to the 2008-2009 global recession, there was already too much industry-wide capacity, and that remains an ongoing challenge.
With China and Europe reflecting overcapacity, global automotive OEM’s must continue efforts to balance global consumption and supply as well as protect margins. Currency headwinds are yet another challenge.
Supply Chain Matters would not at all be surprised by the entry of Chinese produced autos in the U.S. as well as other emerging markets over the next three years.