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Eric Ng

Official policies will tackle over-investment to head off glut

Policies aimed at reining in over-investment in the car manufacturing industry are expected to be unveiled soon by the central government in a bid to prevent over-supply in the sector.

The policies are designed to shore up the market positions of large domestic producers while forcing small-scale manufacturers to close shop or merge with the larger ones, ahead of the lowering of trade barriers required under China's World Trade Organisation entry.

The measures would also encourage local producers to increase domestic sourcing of components and discourage imports of complete cars, industry sources said.

Planning agency National Development and Reform Commission would release before the end of the year a new set of car industry development policies to replace  1994 guidelines, the  People's Daily reported.

It quoted unnamed sources as saying the minimum investment for any new car or engine plant would be raised to 1.5 billion yuan (HK$1.41 billion), and registered capital must be more than one billion yuan.

To restructure the fragmented car industry, the commission will not approve new car manufacturing projects 'in principle', but will encourage existing producers to expand via mergers and acquisitions.

Brilliance China Automotive Holdings said while all new car projects had required the central government's approval since 1994, there was no limit on their production and investment scale.

The government has issued a draft document on the long-awaited new policies, which also includes a proposal that car distributors must separate sales channels of domestically produced cars and imports, the source added.

The move would raise distribution costs of imports and encourage foreign firms to set up shop on the mainland.

In a research report, UBS said the central government was expected to raise tariffs on imports of complete-knockdown (CKD) components from 15 per cent  to 34 to 43 per cent - levels similar to those charged on imports of complete cars.

UBS analyst Henry Wu estimated CKD production, which requires low investment but enjoys high returns, amounted to 4 per cent of total vehicle production and 10 per cent of total sedan production.

Merrill Lynch analyst Grace Mak said the policy aimed to bolster the local car parts industry.

The Brilliance source said the proposed move would not affect its joint venture with BMW, which started production this month by assembling CKD components. Next year, the venture will produce cars with 40 per cent local content, the minimum required to avoid being charged higher tariffs under the proposed new rules.

The local content ratio for Denway Motors' Honda Accord was 65 per cent, and Brilliance's mini-van was 90 per cent, Mr Wu said.

Of the mainland's 123 carmakers, just two had annual production of more than 500,000 units and eight had output of more than 100,000 units, Jiang Lei, executive vice-president of the China Association of Automotive Manufacturers,  told the People's Daily. Some 75 make 1,000 cars a year or less.

In the first half, the mainland's sedan sales surged 82.44 per cent year on year to 842,800 units, out of total production of 2.03 million cars sold, Mr Jiang said. Total imports amounted to 88,781 units, of which 53,441 were sedans.

Ms Mak said the new policies would hit the low-end makers hardest, where the over-supply concerns were most acute.



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