Not Just Solar: The China Car Industry Capacity Problem

June 12, 2013, 6:16 PM

Not Just Solar: The China Car Industry Capacity Problem

By Michael Dunne

Where Chinese solar panels lead, can made-in-China cars be far behind?

China has the capacity to build twice as many solar panels as the world needs–so much so that the Middle Kingdom, according to European officials, has been dumping them overseas. So desperate is the drive to unload extra stock that the Chinese are selling at prices 88% below market value, according to EU trade officials. The EU approved punitive tariffs last week. We’re bound to see a similar, if not quite as extreme, story in cars. By 2018 Chinese and global auto makers, with new factories scattered across China, will be equipped to make more than 30 million cars a year. To put that number in perspective, consider that 30 million cars amount to twice the size of the entire U.S. market.At the same time, car demand in China has slowed significantly since the heady figures of the last decade, resulting in a yawning gap between capacity and sales. Car dealers nationwide reported mounting inventories in May, a surfeit of idle metal.

Chinese officials, however, remain sanguine. “In the past three decades every time we thought there was overcapacity in the auto industry, we were proved wrong,” Dong Yang, chairman of the China Association of Automobile Manufacturers, told reporters earlier this week.

Maybe so. But looking in the rearview mirror means you can neglect to see what is right in front of you. And what is becoming increasingly apparent is that new car-making capacity is being added as quickly as ever–global and Chinese auto makers have announced billions of dollars in expansion plans through 2020.

With such a huge base–China is now the world’s largest market–one year of lackluster growth can throw supply and demand completely out of kilter. Cars not absorbed within China will need to find an alternative home in overseas markets.

The looming China car export threat has not gone unnoticed. ”If China exports only 10% of what it produces, the risk we face in our home markets is enormous,” Sergio Marchionne, chief executive of Chrysler and Fiat, warned recently.

Amidst slower growth in China, Chinese vehicle exports are already jumping. In 2012, China shipped more than one million cars for the first time. That number could double to two million by 2016. Today, the vast majority of Chinese car exports go to emerging markets in Africa, the Middle East and South America, where customers care more about price than fit and finish.

Now, however, the Chinese are starting to deliver cars into more sophisticated markets like Australia and South Africa, threatening to deliver knockout blows to some established local producers.

Ford Motor Co. F -0.91% last month announced its decision to stop making cars in Australia, citing an expensive home currency and killer competition from Asian producers, including the Chinese. ”Manufacturing is not viable for Ford in Australia in the long term,” Ford Australia President Bob Graziano told reporters. Australian consumers find Chinese car prices, which start as low as $12,000, simply irresistible.

As with solar panels, the decisive car battleground will be in Europe, where Germany is the only remaining competitive manufacturer of cars. Look for the Chinese to enter the continental market via the younger markets in Eastern Europe.

But they won’t stop there Great Wall Motor 2333.HK -3.97%, China’s largest SUV maker, has already planted showrooms in Rome and other European capitals.

How things play out in Europe will undoubtedly have implications for the U.S. market in the years ahead.

If car demand in China remains tepid, you can bet on seeing more Chinese cars on European streets in a hurry. Then it will be up to the European Commission to determine just how far below market value China-made cars are priced.

China, already angry about new EU tariffs on solar panels, will no doubt counter punch with an investigation into Europe’s lucrative luxury car exports to China.

When trade tempers flare it is easy to lose sight of the core provocateur. There’s simply too much capacity. Massive investment in new car plants–by both foreign joint ventures and Chinese companies – has been based on the key assumption that China’s economy would continue to expand at high rates of growth. That’s no longer the case–and the pain is just starting to register.