Chen Bin:China auto industry overcapacity

I once said that if 12 million vehicles were sold in 2009, there would be a net increase of 7 million cars. So what does that mean? A net increase of 7 million cars would force China to establish another refinery station with the capacity of 200 million tons per year. We have already shouldered a vast amount of pressure.

The current circumstances propel us to pay attention to sustainable development and attach importance to the abilities of technological innovation and found a harmonious relationship between the development of automotive industry and social environment. In the past, we adopted a single-element model to expand the production capacity as large as possible. Now it is time to change our mind.

Secondly, we have to speed up the industrial restructuring and help enterprises to enhance the capacity of technological innovation in order to prevent overcapacity. This year the auto market has embraced a rapid rebound. Favored by some policies, certain types of cars have even been sold out. The utilization rate of manufacturing capacity is nearly 80%, which is a normal proportion. Driven by market demand, some companies have taken steps to increase investment and expand production capacity. There are some signs of over development. Frankly speaking, Chinese auto market is faced with several difficulties to reach the goal of steady growth in a long term. Since the usefulness of policies will decrease and the pressure from social circumstances is increasing, Chinese automotive industry would face a slower growth rate in the next few years. Therefore new capacity may not be utilized immediately.

According to our findings, the utilization rate of capacity this year is pretty high. Nevertheless, the planning production capacity is still much higher than the market demand in the next two years. If we do not guide and monitor the automotive industry properly, the utilization rate of capacity would be in decline and may decrease to less than 70%. At that time, overcapacity would be a real problem.

Recently, the State Council executive meeting has passed a bill about dealing with the overcapacity and providing proper guidance for Chinese automotive industry. Although the problem of overcapacity has not become an obvious obstacle, we could see the possibilities. I once attended the meeting held by the State Council. Some ministers said that we should pay attention to the potential threat of overcapacity.

Admittedly, automotive industry is an integral part of economic development and contributes to the change of economic development model. Under the macroeconomic circumstances which promote the economic development and the change of development model, we have to handle the relationship between development and restructuring. China should pay much more attention to the adjustment of economic structure. All the entrepreneurs should carefully arrange the money and try the best to foster independent innovation capacity and improve the industrial structure. Automakers should spend more money on developing energy-saving and new energy vehicles. Gripping a positive position in market competition is very important. All the automakers should struggle to achieve a sustainable development in a long term. It is an urgent task to cope with industry-wide overcapacity and stop expanding the capacity of traditional vehicles blindly.

The next topic is about the development of new energy cars.

Electric car is believed to be the best option of new energy vehicles. Before the technology becomes mature and charging infrastructure is established, rechargeable hybrid vehicle with the function of idling stop would be a standard choice. We should say that the revitalization plan for new energy vehicles is well thought out. From R&D of different components and commercialization to improvement of complementary facilities, we have released all kinds of policies which may cover every aspect of automotive industry. The combination of all the measures would result in industrialization of new energy vehicles. As the new energy car is a breakthrough, we can promote independent innovations and cultivate some native brands, a step which will equip Chinese auto market with new competitive advantages. We are actually bringing the development of new energy cars into a new era. Our actions will boost the enterprises’ enthusiasm to research and develop the new energy cars including electric cars. But we have to care about the following issues.

On one hand, we should fully understand that the R&D of electric vehicles poses a high technological threshold. In the field of motor, battery, management system, production of key components and basic raw material, China is still far behind the foreign counterparts. All the enterprises should be objective about their technological capacity and make prudent decisions about how to develop new energy cars.

On the other hand, due to a variety of considerations, a large number of regional enterprises have taken actions to set up new energy car projects. Although new energy vehicles fever has emerged, many companies simply do not have the R & D capabilities. Nor do they have the core technology. Those companies just buy key components from other countries and assemble all the parts. First of all, they want to meet the policy and market demand. Second, by way of developing new energy cars, the companies seek to obtain the automobile production qualification, which is not in accordance with our policies and may exert negative effects on the development of new energy vehicles.

In the fourth part, I would like to talk about the issue of competition in a post-crisis auto market.

At present, as the market sales and enterprises’ economic profit began to rise, the automotive industry has entered a rapid development track. Objectively speaking, Chinese auto market is in a growth period. There is a huge potential demand for urban and rural areas. The automotive industry will embrace a rapid development period which may last for several years.

In the post-crisis era, Chinese automotive market will be the most competitive one across the globe. The world's major multinational companies regard the Chinese market as the center of a global strategy. You can find nearly all the world-renowned automobile brands. No matter which kind of vehicle you are looking for, such as a smaller sedan or a luxury car, Chinese dealers will always offer a satisfactory answer. What’s more, Chinese brands are also growing rapidly with an increasing volume of production and sales. Chinese automakers have already begun exporting the products to other countries. More than 100 automakers are facing an integrated consumer market. The competition of brand, price, service and new products is very fierce. China has become the main battlefield for all the automakers across the globe.

According to the past experience, the fierce competition would result in some large-scale mergers and acquisitions. As a consequence, only the fittest ones can survive in the competition. I hope that all the entrepreneurs should understand the current circumstances and implement the development strategy in order to be a winner in the fierce market battle.

First of all, an in-depth study of M&A strategy is necessary. We should support those merger deals between two top automakers which are aimed at optimizing resources. The property rights could be used as a link and the production is a main line.

Second, as to the production strategy, miniaturization has already become a major trend and new energy vehicles represent the future of passenger cars. Without knowledge about smaller cars, no automaker could survive in the market. The traditional automakers with a bad performance would still be a loser in the era of new energy cars.

Third, for all the automakers, the intensity and breadth of localization strategy will determine development prospects of Chinese business. Only by way of localization could enterprises lower the cost and improve adaptability of products. It is difficult for some companies which have no idea about technology, human resources and brand localization to be winner in the competition.

Fourth, a strong independent brand is the basic symbol to reflect a company’s ability to achieve sustainable development. Large groups should adhere to the strategic policy of walking on two legs. On one hand, cooperation with other partners and a “Win-Win” policy are indeed important. On the other hand, the automakers should pay great attention to their own brands and keep in charge of the general direction of development.

Last but not least, I would like to say something about the adjustment of automobile components management.

The Ministry of Industry and Information Technology and the National Development and Reform Commission have issued an order on August 28th. The authorities have revised regulation rules of imported cars of Chapter 11. The standard of vehicle-related characteristics has been modified and related rules have been abandoned. There are so many reports about this adjustment and I have read some of them. I do not want to make comments from a professional point of view. I have to say that the decision to formulate that policy several years ago was correct. And the adjustment of policy is right as well. In the past five years, innumerable changes have taken place and the production and sales volume has been more than doubled. We have established a matching system of automobile components and independent R&D and development of native brand have achieved great progress. China has a top production capacity and strong market demand. The facts tell us that the automakers which are in pursuit of short-term profits would face tough obstacles and difficulties in the future. Only the ones which are willing to make contributions to Chinese automotive industry and seek to obtain long-term interest could be the final winners.

Finally, I wish the forum a complete success. Thank you very much! (Yalong、Qinghua)

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