BREAKINGVIEWS-China's car surplus should worry global giants

Fri Jan 13, 2012 9:17am GMT

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, Jan 13 (Reuters Breakingviews) - Demand in the world’s largest auto market has shifted to a lower gear. China’s vehicle sales grew just 5 percent by volume in 2011, the slowest pace in a decade. Gridlocks and pollution limit growth. Meanwhile, foreign automakers face two problems: not only are they less welcome in China, but they may soon have to deal with domestic rivals trying to export their surplus.

The market has jogged along briskly until now. The number of cars sold doubled from 2008 to 2010 thanks to government tax incentives and subsidies to help out manufacturers. The result is chronic congestion in the Chinese capital, which has 20 million people and 4 million cars. As complaints about pollution mount, local governments have started to curb demand instead. New buyers must sometimes wait a year for a licence.

Yet production continues. China had 6 million units' worth of unutilised capacity in 2011, equivalent to 40 percent of last year's sales in China. China is set to build two-thirds of the world’s new capacity in the next five years, according to an estimate by KPMG. China's low-cost models won't flood developed markets anytime soon, but they may well attract first-time buyers in other emerging markets.

For foreign carmakers in China like Volkswagen (VOWG_p.DE), it's a double headache. On one hand, they're being edged out. The industry will be removed from a list of official targets for foreign investment starting late January. Worse, China is likely to start exporting its unwanted cars. There's a lot of room to do so too: even after exports hit a new high of 800,000 in 2011, they make up just 6 percent of total auto production in China, versus as much as 50 percent for Korea.

Truckmakers have already set a precedent. KPMG predicts that in 2015, one in every five trucks manufactured in China will be made for export. Carmakers elsewhere have even more reason to worry, since China's overcapacity is the size of the whole German car market. Before long, vehicles could be China's most controversial export.

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CONTEXT NEWS

-- The number of cars sold in China rose by 5.2 percent in 2011 from 2010 to 14.5 million, the official China Association of Automobile Manufacturers (CAAM) said on Jan. 12, at the lowest pace in the past decade. CAAM forecasts that car sales for 2012 would grow 9.5 percent by units.

-- China’s National Development and Reform Commission removed certain categories of auto manufacturing from a list of officially encouraged categories of foreign investment in late December. The rules will become effective on Jan. 30.

-- Reuters: China 2011 car sales rise at slowest annual pace [ID:nL3E8CC2O1]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [GU/]

(Editing by John Foley and David Evans)

((wei.gu@thomsonreuters.com)) Keywords: WG BREAKINGVIEWS GU/

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