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James Bryant

Is China’s Auto Industry Ripe for Consolidation?

by James Bryant | Dun & Bradstreet Editor

September 18, 2015 | No Comments »

car blueAttending a forum in Tianjin, China, last weekend, Chinese regulators hinted that consolidation of the country’s domestic auto manufacturers could have a stabilizing effect as a sales slump drew the nation’s production overcapacity into sharper focus.

Officials with two top regulatory agencies overseeing China’s auto industry spoke to the industry’s challenges in the wake of a summer routing of the country’s equities markets that has kept consumers away from car dealerships. A deputy director of China’s Ministry of Industry and Information Technology commented that the nation’s slowing car sales are hurting the industry’s profitability. Plus, weaker competitors might become targets for mergers or acquisitions.

A deputy director with the National Development and Reform Commission spoke to “severe structural problems” in China’s automotive sector and urged the country’s carmakers to redouble their efforts to market their products outside China.

These statements came a week after the China Association of Automobile Manufacturers said it was lobbying the government to support stimulus actions that might help spur domestic demand.

The auto association is urging the government to reduce the purchase tax for automobiles by half and to increase the limits on car purchases in some Tier 1 cities. The association also claims that efforts to curb pollution and energy consumption have hurt automobile sales.

The China Association of Automobile Manufacturers’ lobbying for stimulus measures came after sales tallies in August revealed the fifth straight month of declining numbers. In the effort to attract wary buyers to showrooms, China’s auto manufacturers and retailers have resorted to steep discounting, which has eroded profits.

Industry watchers in China have interpreted the comments by top regulators to mean that stimulus is the less likely course of government action. China last stepped in with stimulus policies during the global economic crisis. The regulatory winds seem to be blowing more in the direction of establishing policies that encourage industry consolidation to curb the industry’s overcapacity.

This year, capacity utilization by 23 major carmaking joint ventures in China dipped below 100% for the first time, measuring just over 94% in the first half of the year. Just a year ago the same plants were operating at 107% capacity. Even as capacity utilization has dropped, still more capacity has been added in 2015, and more is set to come on line next year.

Some estimates forecast China will build 50 million cars in 2015, a 20% rise over the prior year. However, China is only expected to sell about 25 million cars, which represents 7% growth over 2014.

Industry Impact:

If China’s car sales erode further, 2015 could be the first year in over a decade when year-over-year sales fail to grow. Unless consumer confidence improves, carmakers and dealers may have to resort to more drastic discounting to sell cars domestically. Greater effort will also have to be made to export more of China’s excess capacity. Steep discounts combined with trouble selling overseas could significantly undermine profitability, which could cause some financially weak players to seek M&A deals with larger rivals.

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James Bryant is an industry editor for Dun & Bradstreet. Based in Austin, Texas, he writes about issues affecting the global manufacturing sector. He’s been the company’s specialist on the auto industry for 15 years.

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