Market downturn exposes excess capacity facing automakers


Yang Jian

Automotive News | 2018-11-30

SHANGHAI -- When new-vehicle sales in China were rising the past two years, a slew of domestic carmakers and several of their global peers were already operating well below production capacity.

The recent downturn in the market, which started in July, is now exacerbating the excess capacity some automakers are saddled with. 

To ease the burden, at least three Chinese automakers have attempted to sell manufacturing subsidiaries or recruit investors in the past few months. But none of them have succeeded. 

Changhe Automobile Co. has two plants in the east China province of Jiangxi, which can produce a combined 300,000 minibuses, compact sedans and subcompact crossovers a year at full capacity. 

With deliveries falling short of 40,000 in the first eight months of 2018, the company on Sept.  4 placed up for sale the main assembly plant with annual capacity of 200,000 vehicles. Nearly three months have passed and no buyers have expressed interest. 

Borgward, a German brand resurrected four years ago by Chinese truck maker Beiqi Foton Motor Co., is in a similar predicament. 

On October 9, Foton announced a plan to sell a 67 percent stake in Borgward. While there has been speculation that some Chinese real estate developers might be interested, Foton says no substantive progress has been made to strike a deal.

Foton can build up to 180,000 Borgward vehicles a year at one of its plant in Beijing. But the Germany brand only delivered 28,100 vehicles in the first ten months, according to the China Passenger Car Alliance, a Shanghai-based consultancy. 

With lackluster sales, Borgward racked up a loss of more than 1.6 billion yuan this year through August, according to Foton.

Chery Automobile Co., another Chinese carmaker burdened with surplus capacity, invited outside parties on Sept. 25 to bid for 18.5 percent of its shares. But no suitors had approached the company when the invitation expired last week. 

Chery, which can produce about 1 million cars and light trucks a year in the east China city of Wuhu, sold less than 442,000 vehicles in the first ten months. Low factory utilization contributed to the company¡¯s 1.4 billion yuan ($201.4 million) loss in the first nine months of the year.

Global automakers in general are faring better than local peers in coping with the market contraction yet four companies have seen capacity utilization sink low enough to dent or erase profits.

Ford Motor Co., PSA Peugeot Citroen, Hyundai Motor Co. and Kia Motors each have multiple plants in China. But their sales have been weak in recent years due to the lack of new products, especially crossovers.

With the market running out of steam, they are operating at a small portion of production capacity. 

Changan Ford, Ford¡¯s main joint venture in China that builds Ford-badged sedans and light trucks, has annual capacity of 1.4 million vehicles. But in the first ten months, the joint venture¡¯s sales fell below 336,000. 

PSA, whose two joint ventures can produce up to more than 1 million vehicles for Peugeot and Citroen brands, delivered less than 285,000 vehicles in the first ten months of the year. 

The two chief Korean brands fared no better. Hyundai and its affiliate Kia can build a respective 1.65 million and 900,000 vehicles a year at full capacity in China. Yet, in the first ten months, Hyundai delivered roughly 570,000 vehicles while Kia sold less than 280,000 vehicles in the market.

With the downturn accelerating in the past four months, China¡¯s auto market is on track to end 2018 with an annual decline ¨C the first in nearly three decades. 

And Beijing has made clear it has no plan to roll out tax incentives to stimulate demand on the domestic car market. 

It all means the burden of excess capacity that automakers are facing will soon reach the unbearable point. That in turn likely will trigger an industry-wide consolidation. 




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