Is it an "alarmism" to say that overcapacity in the auto industry?

“Overcapacity” has always been a hot topic in the auto industry. Since 2013, China’s auto production and sales have exceeded 20 million units. At that time, the Chinese auto market is in the golden stage of rapid development, coupled with an annual sales volume of 20 million. Many car companies have seen the huge potential of the Chinese market and began to expand their capacity reserves.

While companies are paving the way for rapid market growth, and believe that the Chinese auto market can rise again on the basis of an annual sales of more than 28 million vehicles, consumer demand has seen a decline in sales. The car market situation in 2019 is also more severe. Over the years, in the context of rapid economic growth, hidden problems and crises seem to be on the verge of exploding.

1. How is the overcapacity in the automotive industry reflected?

The debate over whether China’s auto production capacity is excessive has also existed for decades. Referring to the evaluation criteria of developed regions such as Europe and the United States, the capacity utilization rate (or equipment utilization rate) is generally regarded as an important indicator of whether the capacity is excessive. The normal range of capacity utilization is 79% to 83%. If it exceeds 90%, the capacity is insufficient. If it is less than 79%, there may be overcapacity.

In recent years, although no institutions have done statistics on the total production capacity of the automobile industry, it was mentioned in a report entitled “Capacity of China's Automobile Industry at the End of 2015”: As of the end of 2015, China’s automobile production capacity was 31.22 million. During the period from 2011 to 2015, China's new automobile production capacity increased by 10.87 million units. From 2016 to 2017, the newly added capacity will be about 6 million units. At present, China's automobile production capacity is still in a period of continuous expansion. (Source: China Passenger Car Association)

12 Major Chinese Automobile Groups

From the above statistics, it can be seen that the current total production capacity of the industry exceeds 40 million vehicles. It is estimated that, by 2021, the Chinese automobile production capacity will exceed 58 million vehicles, excluding more than 4 million vehicles planned by emerging auto enterprises that have just acquired or not yet obtained automobile production qualifications, the growth rate of capacity reserves is far quicker than the growth of demand in the car market.

Since 2018, China's auto industry has encountered great pressure, and suffered the first decline in sales in the market. The annual sales volume was only 28.08 million units, down 2.8% year-on-year. In the same period, the capacity utilization rate of the automobile manufacturing industry was less than 70%. In addition, from the current economic efficiency indicators, the overall growth rate of the market is slowing down, the auto market continues to be sluggish. It is difficult for the market to return to the original growth level in the short term, and the problem of overcapacity will continue to deteriorate.

19 Major Self-owned and Joint Venture Auto Companies in China

As can be seen from the above table, more than one-third of enterprises have a capacity utilization rate of less than 79%. Due to the rapid growth of some Japanese automakers in the past two years and the conservative layout in the previous period, they are currently in a state of insufficient capacity.

At present, Chinese economy is still in a downturn, and market demand is not strong. Therefore, the decline trend of automobiles has not been alleviated. Except for luxury car companies and some Japanese car companies, most joint ventures and self-owned car companies are in a difficult negative growth. Sales volume of such companies as Beijing Hyundai, Changan Ford and Dongfeng-Yueda-Kia are less than half of their capacity reserves. In addition, Dongfeng Peugeot Citroen Automobile, BAIC Motor and Changan PSA, which are not listed in the above list, are also the “worst-hit areas”.

In general, the automobile manufacturing industry as a whole appears to be overcapacity, but the structural overproduction is more obvious.

Excessive promotion of new energy industry?

As an emerging industry encouraged by the government and the main driving force for market growth, new energy vehicles are also facing the problem of overcapacity. On the one hand, the traditional automakers are gradually transitioning to the new energy segment, on the other hand, the addition of emerging automakers such as cross-border companies have allowed a large amount of social capital to flow into the new energy manufacturing industry chain, and the capacity of new energy vehicles is disorderly expanding at a high speed and.

According to the plan, the sales volume of NEVs in 2020 is expected to exceed 2 million units. At present, more than 10 million vehicles for the new energy market were planned by the traditional car enterprises and the emerging automakers. The rapid expansion of the new energy industry has also caused the production capacity of the battery industry to be artificially high. Many car manufacturers and battery manufacturers have launched strategic cooperation to build a battery factory. If the current planned power battery is fully applied, it will have a huge capacity of 170GWh/year, which is much higher than the real demand of the market.

2. Hidden dangers behind overcapacity

Overcapacity is a long-standing problem that has been mentioned in recent years. Some experts in the industry pointed out that when the market is in positive growth, there is still overcapacity, but the new capacity input of enterprises is often concealed by the increasing sales figures, and the cost pressure caused by overcapacity is also affordable. But when the auto market shrinks, companies that are expanding rapidly need to bear the consequences. Excessive production capacity and the cost of operation become the burden of car companies, and the bubble with high capacity will be punctuated.

A large amount of idle capacity means waste of resources and brings far-reaching economic consequences, such as restricting economic growth, increasing deflation risks, increasing debt risks, and even triggering systemic financial risks and international trade frictions.

For the enterprise itself, the ineffective investment of a large number of fixed assets will increase the debt risk of the enterprise and slow down the asset turnover of the enterprise. And the partners will also be affected, resulting in a broken relationship between auto manufacturers and dealers and suppliers.

Summary: Based on the current market environment, it is difficult for the auto industry to see significant growth in the short term, and the market will also enter the stock competition state by incremental competition. The pressure from falling sales, sharp profits and capacity constraints has overwhelmed many companies. For large companies, they can adjust themselves through capacity allocation and improved system capabilities. But how do those car companies that are marginalized by the market choose?