A graphic (stats reproduced in table below) shows actual production and excess capacity by region. Notice that China is the only region whose actual production is less than one-half of total capacity. (Note: Data are in millions of units, based on estimates from CSM Worldwide.)
The article goes on to say that
Much as the crash of 1929 reordered the U.S. auto industry, a sudden dearth of buyers will do the same in the People's Republic. Industry watchers expect local companies to absorb much of the pain as the weakest players close and large state-owned companies gobble up the stronger ones.Early in the 20th century, the U.S. auto industry looked similar to today's Chinese auto industry in that there were at any given time anywhere from 40 to 60 serious players in the market, along with hundreds of wannabes. As BW notes, the Great Depression managed to sweep aside many of the weaker players; however, after the depression, the U.S. was still left with about a dozen or so contenders that gradually fell by the wayside during the 1950s and '60s, finally leaving us with the Big Three we know today. Anyone remember Nash? Packard? Studebaker? Or AMC which was swallowed up by Chrysler in the 1980s?
The difference of course, as BW points out, is that most of China's major players are state-owned. This was not the case in the U.S. (Although one might argue that, given the huge wartime contracts thrown their way during WWII, the U.S. automakers may as well have been state-owned.)
However, an important aspect of China's industry that BW has not picked up on is the degree of local state ownership. China's central government has been talking for years about overcapacity and the need for consolidation, but the central government only owns two auto firms (First Auto Works and Dongfeng). The rest are either private or owned by local governments -- in fact, almost all of the rest are local state-owned enterprises. Aside from a fairly recent merger between Shanghai Auto and Nanjing Auto, much of the called-for consolidation simply hasn't happened.
So why hasn't the central government simply forced some of the smaller players together? Because they can't. Local governments in China prize their local industries -- especially their car companies. And they have become quite adept at playing off one central government faction against another when the need arises. This isn't to say that consolidation will never happen, but it will only come through a long and painful process.
The question that I have is regarding the roles of private auto firms in China. If the entire industry were privately-held and therefore subject to market pressures, we would expect to see a shake-out similar to what the U.S. experienced in the 1920s and '30s. But with only the handful of private firms subject to market pressures, will they be the first to go? That would be a shame because Geely and BYD (two private firms) have arguably among the brightest prospects of Chinese auto firms.
On the other hand, Geely and BYD, though private, are undoubtedly valued by their respective local governments in Hangzhou and Shenzhen for their contributions to their local economies. Will we also see local governments willing to go to the mat for private firms? I think we will.
All of which brings us back to square one: what is to be done about global overcapacity in the auto industry? Well, the eventual economic recovery should help somewhat, but beyond that, something's gotta give. Unless we spiral into autarky, not every country can have an auto industry. Will China's state ownership of auto firms give it a leg up in the future fight for global auto market share?
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great questions and great blog. Thank you.
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