“We have no intention of letting up on the accelerator,” Kevin E. Wale, President and Managing Director of the GM China Group, said in early January, discussing the American automaker’s plans for China.
　　
　　Similar to GM, China’s top-selling foreign automaker, Ford says it is ready to shift its comprehensive expansion in the Chinese mainland into high gear. So, too, are automakers from Japan, big winners in the 2005 Chinese market.
　　Germany’s Volkswagen AG, which took over 50 percent of the Chinese market in the 1990s but saw its share drop to 18 percent last year, also expresses a desire to keep pace with the development of the auto industry in China.
　　However, while the world’s top auto brands are expressing unbridled optimism about the Chinese market, a report released by Morgan Stanley in late 2005 told the opposite story.
　　The U.S.-based investment bank warned that, as a result of increasing production overcapacity, car prices are expected to decline in the market, with sliding profits and returns on investment. It’s likely that China’s auto industry will be profitless this year, and there might even be a disastrous recession in 2007, according to the report.
　　While this forecast splashed cold water on the overheating Chinese auto sector, so far there has been little cooling effect on the strategies of automakers.
　　
　　Production up, profits down
　　
　　INTERNATIONAL ASSEMBLY: Workers install auto parts on the line at a joint venture company with investment from Ford. The consumer potential of China’s auto market is luring more overseas investors
　　The Chinese auto market seems to be heading in every way. Auto production stood at 5.71 million units in 2005, and sales of new cars totaled 5.92 million.
　　Apart from the sluggish market for sales of limousines, with an average monthly decline of 9 percent, monthly sales of low-end sedans jumped 57 percent on average and that of medium-sized cars saw an increase of 49 percent.
　　Despite the increases in sales volume, profit levels continued dropping in 2005. Statistics released by China’s Ministry of Commerce show that, during the January to November period, auto sales rose 9 percent over the previous year nationwide, but with a 30 percent decrease in profits year on year.
　　A survey conducted by the China Association of Automobile Manufacturers shows the same problem. In the first half of 2005, the motor industry realized a 4-percent profit rate. But as manufacturers cut prices to compete for market share, the profit margin is becoming slimmer.
　　Profits are pressing nonetheless near the bottom line, but production capacity is still on the rise.
　　According to statistics from the National Development and Reform Commission (NDRC), China’s top economic planning body, auto production capacity in China has reached 8 million units, with 2 million of that considered surplus. Nevertheless, some 2.2 million units of production capacity are under construction, with another 10 million in planning stages.
　　Chen Bin, Deputy Director of the Industrial Department of NDRC, predicted that, by the end of 2010, national production capacity could exceed 20 million units, or double the actual demand.
　　Starting in 2001, China’s auto manufacturing industry has been swinging ever wildly around the balance point of supply and demand.
　　Pointing to 2005’s sharp profit slide and swelling capacity, the NDRC decided to change the green light to red. Initially, in late January, the commission revoked or suspended certificates for car production of 124 manufacturing enterprises nationwide.
　　Follow-up measures are expected soon, and will be aimed at curbing the superheating auto market with an emphasis on production capacity control, according to government sources.
　　Insider watchers say that industry-wide restructuring under macro-control is expected to be the focal point of the auto-manufacturing sector this year.
　　
　　Overcapacity
　　
　　DREAMING OF A PRIVATE CAR: The emerging auto market in China is seen by many foreign automakers as their best opportunity to resurge
　　However, some experts are suspicious of the interpretation of industrial overcapacity. Jia Xinguang, chief analyst at the China National Automotive Industry Consulting and Development Corp., said that any enterprise should maintain a reasonable production capacity, leaving space for further development. Thus, Jia argued, a surplus production capacity of 2 million units is acceptable for China’s auto industry.
　　More importantly, the NDRC relied on statistics self-reported by enterprises. However, some automakers may exaggerate numbers to fictitiously boost their “production capacity,” industry insiders admit.
　　“Perhaps the statistics are inflated with fanfare,” Jia added.
　　Jia said the reality is that ineffectiveness results in overcapacity, and market demand remains lacking in efficient production. This means that small-sized auto producers without established brands are mainly responsible for overcapacity, while leading car suppliers are facing the crisis of insufficient demand. For example, the production capacity of Chery Automobiles, China’s most popular national brand, is restrained at 200,000 units, with more than 1,000 orders left unfulfilled every month.
　　As the new century began, sagging auto sales has plunged European and U.S. automakers into tightened business operations.
　　The latest worldwide sales listing shows that, in 2004, GM topped sales with 8.08 million units, though that declined by 220,000 compared with the same period in 2001. Ford was even overtaken by Japan’s Toyota as the second largest seller, with 6.43 million units, decreasing by 570,000 from 2001.
　　The situation has been slightly better in Europe, though there the market is also facing problems. In 2004, Volkswagen, the biggest carmaker in Europe, realized sales of 5.07 million units, inching up only 30,000 compared with the sales volume of 2001.
　　
　　Chinese market dreams
　　
　　Meanwhile, as the markets of Brazil, Russia, India and China are emerging and experiencing greater consumer demand, the auto industry around the world is also undergoing rapid change.
　　A latest annual report released by the U.S.-based auditing firm KPMG indicates that more than 88 percent of senior directors of auto-making companies believe that, with a growing number of auto buyers in Asia, local brands of Asian companies will see an increasing market share worldwide.
　　Some industry watchers even predict that, as the auto sales slump continues in the United States, traditional domestic behemoths such as GM and Ford will be further plagued by escalated business difficulties, and the auto industry will probably be reshuffled this year.
　　As a result, automakers are trying to foster new, larger and more stable potential markets to stand up to occasional fluctuations of the market.
　　In recent years, China’s auto industry has been soaring, with an increase in double digits. In 2003, China surpassed Germany to become the world’s third largest auto consuming nation. The China Association of Automobile Manufacturers estimates that the country’s auto sales will surge 12 percent in 2006, reaching 6.4 million units, and it is expected to outstrip Japan to rank second place in the world.
　　The ever-increasing income level of urban Chinese people allows more and more of them to own cars. Lately, the skyrocketing number of cars has been causing massive traffic problems in many large and medium-sized Chinese cites.
　　However, even the increasingly severe traffic congestion cannot lessen Chinese enthusiasm for private cars. In 2005, 30 million Chinese people owned private cars, or 24 cars per thousand people, while the world average is 120 per thousand. Auto consumption in the United States is more than 700 units per thousand people.
　　In this regard, China has been the focus of significant attention by overseas investors and companies, and is seen as a country with monster growth potential, particularly in the medium- and low-end market.
　　At present, foreign-funded and joint-venture auto producers still dominate the Chinese mainland auto market. Due to profound market changes, a new round of mergers and acquisitions is emerging, which is believed to provide a good opportunity for foreign dealers as experts forecast.
　　However, risks and defects continue to exist in the market, such as poorly established credit and legal systems, and the significant problem of people defaulting on loans taken out to buy cars.
　　Even in the relatively mature secondhand trading market, complicated legal procedures and taxation system have hindered foreign capital from entering the market.

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