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Bloomberg

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.
According to IHS Automotive forecasts, factories across the mainland will this year be able to build 10.8 million more vehicles than will be sold.
Overcapacity is only expected to get worse for the carmakers. China will have about 11.4 million vehicles' worth of idle capacity by 2017, more than double that of European carmakers, according to data from JSC and Deloitte Consulting.
Some manufacturers already were regretting their plans for Chinese plants that would open in the next few years, said Jochen Siebert, the Shanghai-based managing director of JSC, who declines to name the companies.
"But that decision has been made," Siebert said. "It's done; they cannot backtrack."
"When you get too many competitors with too much capacity, there's just not enough growth to sustain everybody," said Thomas Callarman, a Shanghai-based director of the China Europe International Business School's Centre for Automotive Research. "They're all smart people, and they look at the right things, but I think they read the tea leaves wrong."
For now, the Chinese car market remains profitable.
Chinese carmakers accounted for 7 of the 10 with the highest profit margins in the world, with BMW's Chinese partner, Brilliance China Automotive Holdings, topping the ranks at 82 per cent in the past year.
Volkswagen, which is vying with Toyota Motor Corp and General Motors for the global car sales crown, has 28 plants in China and will open three more in the next few years.
Jochem Heizmann, who heads Volkswagen's China business, said in November last year the company had decided to expand its China capacity to more than the previously targeted four million cars a year by 2018 because it could not build enough to keep up with demand.
In the next few years, however, increased competition amid slowing growth in car sales would result in lower prices, said Yang Yipeng, a Beijing-based analyst at Goldman Sachs' Chinese affiliate.
As the world's second-largest economy cools, vehicle sales are forecast to expand this year at just half of 2013's 8 per cent rate, to 21.3 million passenger vehicles.
The spare capacity might force carmakers to increase sales incentives, hurting profit margins, Barclays said. "This is a heavy asset industry," said Song Yang, an analyst at Barclays. "When utilisation trends down, margins will trend down."


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Chery Automobile

New vehicles parked at a factory in Shenyang, Liaoning province. There were 123 car production plants last year, and the number is expected to rise to 140 by 2017. Photo: Reuters

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China Business

Sales are falling short as carmakers go on factory construction binge


Chinese car market falls prey to overcapacity

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Sales are falling short as carmakers go on factory construction binge

Sales are falling short as carmakers go on factory construction binge