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China Looks to Export Auto Overcapacity on Slow-Growth World

Posted by hkarner - 3. Mai 2017

Date: 02-05-2017
Source: The Wall Street Journal

Beware global auto makers: China is getting ready to flood the world with its car exports.

Last week, a number of Chinese ministries and the National Development and Reform Commission jointly announced long-term plans for the auto industry. Among the goals: Higher developed-market export sales and market share.

Lofty goals for China’s car makers are understandable. The report said autos and related industries bring 10% of the nation’s tax revenue and account for 10% of all jobs. And the industry has capacity to spare. Utilization rates vary widely but range from 60% to 80%. Meanwhile, production continues to rise.

China pumps out 28 million cars a year—compared with 17 million from the U.S. But it probably doesn’t have the consumer demand to absorb all those vehicles. Buyer tax incentives have given sales a periodic boost, but that just brings demand forward. The government trimmed its incentives last year, causing sales growth to fall by two-thirds through April.


Overcapacity is reflected further by the dozens of car makers in existence, many of which are propped up by local governments that are loath to part with these job generators. Consolidation, a more obvious way to improve the industry, doesn’t seem to be a priority.

If there is one thing China knows how to do well, it is export. So why not export its auto overcapacity, as it does with solar panels, steel and glass? China has made inroads in exporting to other emerging markets, where it isn’t dinged for its lower-quality vehicles. China exports 2% to 3% of all automobile production on a monthly basis to places like Iran, which accounts for about a half a million vehicles a year, though growth in this area has stalled in recent years.

Getting into developed markets like Japan, the U.S. and Europe will prove more challenging, given quality constraints. The antiglobalist tone taken by President Donald Trump and others would also seem to be an obstacle, unless China maneuvers its cars in through trade pacts.

Yet that doesn’t mean global car makers shouldn’t view China as a threat. Global auto demand in terms of sales outside China is set to grow just 0.6% this year, according to Nomura estimates. Any attempt by Chinese producers to focus on the highly commoditized industry could put pressure on prices, even if they don’t succeed at becoming major players in developed markets.

The more likely outcome is that China continues to push into emerging markets. This would be troubling for emerging-market experts such as Renault, Hyundai and local brands like India’s Tata or Maruti.

Global car makers will have to contend with the sheer force of Chinese production volumes. Beijing is targeting 30 million cars a year over the next three years and 35 million by 2025, according to the government’s plan. That’s a lot for the world to absorb.

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