CHINA’S AUTO INDUSTRY

IS CHINA BUILDING TOO MANY CARS?

China RealTime Monitor, October 6, 2010

Nissan Motor Co. recently said the company’s joint venture company in China is nearly doubling its manufacturing capacity by 2012 to 1.2 million vehicles a year. The announcement came amid worries among some Chinese government officials about possible excess capacity developing in the world’s biggest auto market. But Nissan’s chief executive Carlos Ghosn quipped: “China is now the second-largest economy in the world, and our ambitions and actions are aligned with the current reality.”

So who’s right? Anxious government officials? Or Mr. Ghosn, who heads both Nissan and France’s Renault SA as CEO?

A senior official at China’s National Development and Reform Commission, Chen Bin, warned at an auto industry conference in Tianjin last month that China’s top 30 auto groups are expected to have combined capacity to build 31.24 million vehicles a year by the end of 2015, up from 13.95 million at the end of 2009, according to media accounts.

Blindly expanding manufacturing capacity will not only harm the health of China’s auto industry, Chen warned, but will also affect the country’s economy as a whole.

Nissan executives maintain the Nissan China unit’s planned expansion is being made to help meet real demand, and analysts seem to agree. Many believe China’s auto industry is still lacking manufacturing capacity, especially in the top tier.

“In fairness to Chen, China’s economic structure gives incentives to local governments to add capacity because new capacity means new investments in new jobs, which means a kind of economic growth,” says Michael Dunne, president of Hong Kong-based investment advisory firm Dunne & Company Ltd. “Local governments provide loans and cheap land and subsidized energy. Add capacity and their jobs are done - they don’t worry about the demand side of the equation. This leads to the kinds of inefficiencies that Chen is warning about.”

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