Friday, 16 June 2017

Over Capacity In China

Land Rover has just moved into car making in China

It must be hard being a car maker in China. Huge growth that was hard to keep up with and even while it slows, the increase in volume each year is still substantial. If you are conservative, you miss out on sales. Overly aggressive in building factories and then the market stalls, expensive machinery is not being properly utilised.

Factories takes years to plan and build, meanwhile much can change. I have said before, cutting the import duty would allow car makers to meet the demand without having to build a new factory for any upswing. When the growth is sustained and then a plant is really needed, then it could go ahead. In normal situations that is what happens.

It is being stated by some in the know that there are car makers who have committed to building factories and now wish they hadn't. However, they cannot turn back and if it creates a large over capacity they will have to live with that. VW in a few years will pass the thirty factory mark in China while GM has over twenty plants. They may all be needed but if things level off or slip back, then profits fall very quickly.

On the other side are local car makers that are state owned companies. One has the capacity to make up to 700,000 cars per annum, but last year sold only 15,000 vehicles! It seems hard to comprehend and is an extreme case. What poor management to get into that situation. These state owned car makers are subsidised by the local government so their excess capacity is not a financial burden on the company, just the tax payer in that region. If they have a joint venture with a foreign firm, that is where the profit lies.

So China has exploded in car production, but like all explosions if not controlled can make a mess. Joint venture operations have been very profitable, but managing the slowdown that is under way in new car sales is where the skill will come in.

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