Chinese car market falls prey to overcapacity

When consultant Bill Russo visited Chery Automobile's headquarters in Anhui province about three years ago, he listened to the company's plans to expand its factories to make as many as one million vehicles a year. But demand did not grow as planned.

Chery today has the capacity to make 900,000 vehicles annually - twice the number of cars it sold last year. Sales have slumped by a third since their peak in 2010.

"Chery is a classic case" of overcapacity, said Russo, a former Chrysler executive who is now a Shanghai-based managing director at consultant Gao Feng Advisory. "The pressure is that once they receive the permission [from the government authorities] to build, they feel like they have to build."

Chery did not respond to requests for comment about its sales falling short of planned capacity.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins in what remains one of the world's most profitable vehicle markets.

By 2017, there would be 140 car production plants in China, compared with 123 last year, JSC Automotive Consulting estimated.