China is clamping down on overcapacity, benefiting companies with established production and sales, such as General Motors, while hurting newcomers to the market.
Foreign automakers received preferential treatment for seven years on their Chinese plants as the country sought foreign investment, China Daily noted in a feature-length report. Now, the carmakers will only be eligible for incentives on factories approved by the government before 30 January, the nation’s top economic planner said on its website in December. More importantly, the rules signal that China will be less inclined to sign off on new applications, according to research firm LMC Automotive.
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“The message is that you’re not welcome here anymore; we have enough guests,” John Zeng, Shanghai-based director of Asian forecasting at LMC Automotive, told the paper.
The push may result in China shutting its doors to new foreign carmakers, benefiting earlier entrants including GM and Volkswagen as their future expansion plans were probably approved by the government already, according to consulting firm Booz & Co.
“For existing players, it’s helpful because you slow down the excess competition you have here in China, which is ferocious,” Ivo Naumann, Shanghai-based managing director at AlixPartners, told China Daily.
GM, the top foreign automaker in China, on 16 February reported record net income of US$9.19bn for 2011. Its market share climbed above 13% last year, more than triple the 4.1% it held in 2001, according to the automaker.
GM is betting demand will accelerate in China. Vehicle ownership in China was equivalent to 4.7% of the population, compared with about 51% in Japan and 81% in the US, according to 2009 figures from the Japan Automobile Manufacturers Association.
GM plans to double deliveries in the country to 5m by 2015 and has just received approval for a new, 300,000-unit factory in Wuhan.
China’s policy change comes as the government looks to move external investment into different industries, Kevin Wale, GM’s China president, said on 15 February.
“In the near term, I don’t see a dramatic change in the way the Chinese government wants to run the automotive industry,” he said in Shanghai.
Volkswagen said on 6 January it would add a seventh car plant in China as it expands production capacity to 3m vehicles a year.
Those who haven’t begun manufacturing cars in the country may be the most hurt by China’s move to control capacity, according to Tzeshen Cheam, a Hong Kong-based analyst at CIMB Securities HK.
These include Tata Motors’ Jaguar Land Rover, Subaru, Renault and Fiat’s Chrysler Group.
Renault and Chrysler have expressed interest in building cars in the country, but Tata has selected a JLR JV partner and is awaiting Chinese government approvals to start operations, chief financial officer CR Ramakrishnan said this week. The application may be the first to test the government’s resolve to limit capacity in a country where foreign carmakers are required to partner with a domestic company before making vehicles.
Earlier this month, Jaguar was said to be in talks with Wuhu, China-based Chery Automobile to form a venture to jointly build vehicles there.
Fuji Heavy has failed to win regulatory approval to build in China because the government considers the company part of Toyota, which already has the limit of two manufacturing partners, three people familiar with the matter said last September. President Yasuyuki Yoshinaga said this month the Subaru maker, which is 16% owned by Toyota, will keep pursuing its China plans until the end of the fiscal year in March, China Daily noted.
“Foreign automakers need China more than the country needs them,” said CIMB Securities’ Cheam.
China has reason to be concerned about overcapacity. Passenger vehicle sales slowed last year, trailing growth in the US for the first time in at least 14 years. The market is crowded with more than 70 producers, some of which failed to sell a single car last year. The market share of Chinese brands in January fell almost 4% from a year earlier, according to the China Association of Automobile Manufacturers, while German and US carmakers increased their share by at least 1.5%.
Overcapacity looms
Mizuho Financial Group, a Tokyo-based financial services firm, estimated in December that overcapacity in China’s auto industry began emerging last year and the glut will worsen every year to the end of 2015.
The incentives, including exemptions of import duties on plant equipment and lower taxes, expired on 30 January, the first business day of the Chinese lunar year, after the National Development and Reform Commission removed auto manufacturing from a catalogue of industries in which external investment is “encouraged.”
NDRC’s press office did not answer China Daily‘s request for comment.
“Inclusion in an encouraged foreign investment category is a signal to officials throughout the government to green-light a project,” Lester Ross, a Beijing-based partner at Wilmer Cutler Pickering Hale & Dorr, told the paper. “A project which is not listed in the catalogue is merely deemed to be ‘permitted’ so the relevant officials have to be persuaded to approve the project, effectively slowing it down as well as reducing its eligibility for preferences, like driving through a series of yellow lights.”
Longer waits
Bill Russo, a senior adviser at Booz & Co who was formerly Chrysler Group LLC’s China head, said the rule changes mean carmakers may lose out on cost savings of about $20m to build a factory and wait longer than the average one to two years needed to receive approvals and business licences.
Russo said projects that focus on hybrid or electric cars, invest in the lesser-developed regions of China or bring in key technologies may have an easier time obtaining approvals after the NDRC kept low-emission vehicles on the “encouraged” list.
The policy shift doesn’t mean China is cutting off the flow of foreign investment into the automotive industry, LMC’s Zeng said. Premier Wen Jiabao’s government wants to divert investment into other areas such as auto components and nurturing local research and development capability, especially in hybrid and electric vehicles, he said.
“China is still encouraging development of the auto industry in China,” Zeng told China Daily.
“The government focus has just shifted from made-in-China to create-in-China.”
