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Officials Consider Cull as Chinese Car Industry Reaching Crisis Point

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Officials Consider Cull as Chinese Car Industry Reaching Crisis Point

The automobile industry was once hailed as one of China’s greatest success stories. In less than a decade, China became one of the world’s largest producers of cars. However, this rapid growth has now halted and some of China’s leading car manufacturers are struggling. Even worse, many carmakers are facing bankruptcy, leading Chinese officials to consider forcing the closure of less profitable manufacturers to make more room in the market.

Since the late 1990s, China has seen the rise of over 1,300 automobile makers, many small to medium sized firms. However, there are currently 72 brands producing mass-production vehicles, more than any other country in the world. Some of these leading manufacturers are struggling to cope with increased competition from not just the massive number of small carmakers flooding the domestic market, but also an increasing number of foreign makers selling cars in China.

Rise of an industry

China’s motor industry is still relatively new. Besides government officials and the very wealthy, few people in China owned a motor vehicle prior to 1990. However, a growing economy saw a huge domestic demand for cars from 2000 onwards. A burgeoning middle class with ready access to disposable income and the ability for the first time to buy a car on finance, saw China’s automobile production rise from 3.25 million vehicles in 2002 to 18.3 million at the industry’s peak in 2010, and nearly all cars bought in the domestic market were Chinese made.

However, the introduction of foreign companies into the marketplace has seen sales of Chinese made vehicles plummet. This has been good news for European carmakers who have seen an increase in sales thanks to Chinese demand. Indian-owned but European-based Jaguar Land Rover have seen a 91% increase in sales to China and have reported a record second-quarter profit of over £500 million thanks to Chinese sales of their Range Rover Evoque. However, this increase in demand for foreign makes has resulted in several of China’s biggest auto manufactures now facing closure.

Decline

Shenzhen based BYD, and China’s third largest vehicle manufacturer, Dongfeng Motor Group, have both seen profits plummet over the last 12 months. Dongfeng’s reported sales for the first half of 2012 were down by 8.36%, while BYD have suffered a staggering 94% drop in earnings over the same period, and they are not alone. Many manufacturers are battling rising debts and plummeting sales.

It is not just the domestic market that is causing the problem, either. The Chinese car industry has failed to penetrate the United States or European markets with their own brands of motor vehicles. European and American car buyers are not impressed with many Chinese models and the industry is struggling to match their foreign counterparts on quality, refinement, technology and safety. Buyers in these markets, many of whom are suffering due to the economic downturn, prefer to buy from carmakers they know, such as BMW, Land Rover, Vauxhall and Mercedes, rather than obtain a car loan for a relatively unknown Chinese model.

Industry cull

With an increase in competition from abroad, the Chinese domestic market has become bloated say Chinese officials, which is stifling development and any attempts to succeed in the export market. Things have got so bad, the Ministry of Industry is considering forcing many near-bankrupt automakers out of the market altogether, in order to relieve the burden on more profitable companies. While China has some large manufacturers such as Dongfeng, many of the 1,300 vehicle makers are small time operations that produce fewer than a thousand vehicles a year. These companies are stifling the more serious makers’ attempts to earn enough from the domestic market to make the necessary improvements that will enable them to make in-roads in the much-needed export market.

While Chinese officials are yet to implement their plans, with a resulting surge in unemployment causing consternation, the move is necessary in order for the Chinese car industry to shift from quantity to quality say analysts. Lewis Liu, director of Automotive Advisory of KPMG China was reported as saying that brands without the scale, economic efficiency and technology to be able to participate in international competition should be pushed out of the market in order to allow those that can achieve export success to flourish. “The government’s role should be to recognize the importance of those principles of market development and guide the replacement of outmoded capacities,” added Liu.


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Chinese Car industry

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