China aims to slam brakes on car capacity
Less successful producers face prospect of being driven out
Chinese regulators plan to impose restrictions on automakers’ investments in new capacity so as to prevent ‘haphazard investment and redundant development’ in the automobile industry.
The National Development and Reform Commission (NDRC), seeking to address mounting excess auto manufacturing capacity, wants to restrict ways in which automakers can invest in new capacity to manufacture traditional gasoline-fueled cars as well as electric battery cars, according to a draft of the policy that has made public.
To be allowed to invest in greenfield developments such as new factories, automakers would need to have healthy, above-industry-average capacity utilization as well as R&D investment, and a commitment to green cars and exports, among other conditions.
Industry players are alarmed by the prospects because they said that very few automakers would be able to meet the conditions fully if the proposed policy took effect as drafted.
“It basically means, more or less, no more new factories. The government wants us to use existing idled factories to expand capacity instead,” a China-based executive with a global automaker said.
The proposed new rules come at a time when some automakers – especially Toyota Motor Co, Nissan Motor Co and Geely – are growing their market share in China and are keen to invest in new capacity.
The NDRC wants to prevent the excess capacity problem from becoming a crisis similar to those that have previously hit other industries in China – from solar panels to steel to ships, according to the four sources.
By making it difficult for automakers to install new capacity, China’s policymakers want to trigger an industry consolidation, said the sources – two industry officials and two executives from automakers.
NDRC did not respond to a request for comment.
Bloated industry
According to a 2017 study by PricewaterhouseCoopers (PwC), one-third of China’s overall capacity at present, or 14 million of the 42.8 million vehicles factories can make, is estimated to be idled.
China’s auto industry has grown rapidly, helped by generous subsidies and funds from the central government, as well as provinces trying to accelerate development and competing to create jobs.
PwC said China has some 80 automotive groups and more than 180 vehicle assemblers but many have not had meaningful output or sales for years. Now, with growth set to slow and numerous start-ups racing to add capacity to make electric cars, less successful producers face being squeezed out of the market.
The proposed policy, which the NDRC published for public comment in July, said the agency wants to “encourage enterprises to carry out merging, reconstruction and strategic cooperation through equity investment and other modes, so as to... organize production jointly and enhance industrial concentration.”
The industry largely supports the “spirit” of the new policy but wants to see the NDRC ease the restrictions, according to the four individuals who declined to be identified because of the sensitivity of the matter.
The NDRC indicated it may modify the proposed rules but remained insistent on policing investments.
At an industry conference in North China’s Tianjin, Nian Yong, head of the NDRC’s Department of Industry Coordination, said the agency will strictly prevent “haphazard investment and redundant development” in the auto industry, apparently referring to the proposed rules.
Nian said the authorities in Beijing will soon publish and implement the new rules, without elaborating.
Boom and bust
Xu Haidong, an assistant secretary general of the China Association of Automobile Manufacturers, said capital was flowing into the sector on expectations of long-term growth.
“But given the well-known historical pattern of booms and busts, the State should prevent investment from losing control, prevent blind construction, disorderly development, and promote high-quality development,” Xu told Reuters.
There is, however, a view among some industry officials that no matter how severely the NDRC restricts investment in new manufacturing capacity, the decree might be disregarded given fierce competition among different cities and provinces chasing investments.
“Provincial governments will prioritize attracting new investment and in the process will find ways to ignore the NDRC’s rules,” one of the two industry officials said.
According to the proposed rules, any automaker planning to invest in new capacity for gasoline-fueled cars and hybrids would have to clear five conditions, including the utilization rates for its manufacturing capacity being above the industry average, and its output of so-called new-energy vehicles being above the industry average.
Draft conditions also include hard-to-meet thresholds for R&D spending, exports and vehicle production capacity utilization rates in provinces where new plants are proposed, including for electric vehicles.
Already, there is evidence that automakers are being asked to help cut back excess capacity.
When Nissan decided to boost its China capacity by 40 percent to as many as 2.1 million vehicles a year by 2021, it said nearly half the new capacity would come from two existing assembly plants, even though it is looking to build a new plant in Wuhan, Central China’s Hubei Province.
Toyota, which is looking to boost its China capacity over the next few years by 240,000 vehicles a year, or by about 20 percent, plans to add extra capacity to its existing manufacturing facilities in Tianjin and Guangzhou, capital of South China’s Guangdong Province. Toyota declined to comment.
One industry executive said that he understood the government wanted to maximize existing capacity, but the reality was “much more complicated.”
“Companies and executives have egos, but most important, they want to invest the way they want to – freely and without constraints,” the executive said.