2012 is a very difficult year for China's auto industry. According to semi-annual reports released by carmakers, 90 percent of carmakers didn't reach half of sales target set in the beginning of the year. Among them, China's own brand made the worst performance. Furthermore, other cities are inclined to follow Guangzhou's purchase restriction policy.

　　Each carmaker still actively expands production capacity though facing a sluggish market. In particular, many joint ventures choose to build new factories in order to increase production capacity in China.

　　SoHu:In accordance with the development of such a situation, will China's auto industry face the pressure of overcapacity，just as the European car market is suffering a major crisis.

　　Mark Andrews:Well I think there are a number of themes that run through this question and I can understand why the companies do this.

　　Firstly, since 2009 China has been the world’s largest auto market, few manufacturers can afford not to participate in such a market. This is especially the case because after the 2008 Lehman Brothers collapse and the ensuing global financial crisis there has been a general malaise in the more developed markets of North America and Western Europe. This has led to poor car sales in these markets and with a lack of strong political will to sort out fundamental problems in the economies, consumer confidence is likely to remain poor. China on the other hand has only experienced a slow down in sales since the beginning of last year.

　　Foreign manufacturers can only achieve limited sales by an import method. This really seems best suited for the super luxury models such as Bentley, Porsche, etc. where import taxes do little to dissuade potential buyers and may even help to enhance desirability as it can symbolize wealth and achievement. However, even if you look at the more mainstream luxury brands you will see that in order to succeed they have to produce in China. Sales of Audi and BMW are far in excess of Jaguar even though they have directly comparable products. And I think it is for this reason that manufacturers such as Jaguar Land Rover, and Infiniti have realized that if they are going to compete in China they have to be produced locally.

　　The reason foreign manufacturers are forced to produce here are the high import duties. This then means each has to build at least one factory and also the company has to have a joint venture partner. With so many domestic manufacturers and foreign manufacturers building factories it is not really surprising that with the cooling of the car market there is overcapacity.

　　Added to this is the rule allowing each manufacturer up to two joint ventures. This means that with some manufacturers the two JVs are in open warfare. The most obvious example is Volkswagen where its two partners SAIC and FAW have directly competing products in most segments but is also true of others such as Honda who has one partner with the American Accord and the other with the European version.

　　SoHu:In the face of the downturn trend of the car market, how can carmakers, especially China's own brand, make adjustments and improvements? Does China's auto industry need to seek structural changes and adjustments?

　　Mark Andrews:In short yes. The current model whilst it has been highly successful in boosting the car market in China has not really achieved its real goals and is likely only to hold back carmakers in the future.

　　The original idea behind the joint venture requirement was for domestic manufacturers to enhance their capabilities from these partnerships so that they could increase their technology and be able to produce modern vehicles themselves. This simply hasn’t happened. None of the large state owned enterprises (SOE) which are the Chinese partner in the joint venture has created a car brand (I exclude 面包车here) that is of any real significance. The only possible exception is SAIC and that is on the back of bought in technology courtesy of buying the remains of MG Rover. Instead most have been very content to sit back and enjoy the profits brought by the JVs.

　　One point made at the 2011 Chengdu Auto Forum was that manufacturers use their plants in Thailand for export whereas foreign producers here mainly use their plants to satisfy demand of the Chinese market. With only half ownership there is limited incentive for foreign manufacturers to make Chinese plants part of their global supply chain.

　　There appears to be many vested interests in the large SOEs. There needs to be a realization by government that the real winners in the race to produce domestic brands are with the privately owned and smaller provincially owned companies such as BYD, Great Wall, Geely and Chery. They need to be taken seriously and treated on a level playing field with the large SOEs.

　　Part of the problem is that there are simply far too many producers. If you look at the world market sales are dominated by around ten companies who each control a handful of brands. One figure often said for China is that there are over a hundred producers. These seem to range from little more than garden shed screwdriver producers to companies with world class factories.

　　There has to be consolidation and this shouldn’t just consist of large SOE monoliths taking over up and coming (and ultimately more competitive) producers. Equally I think the joint venture model has to be changed to either allow wholly foreign owned producers or allow the foreign partner to take a far greater percentage.

　　The remaining Chinese producers after consolidation need to concentrate on creating a coherent brand with a limited number of models. These need to be competitive with foreign brands and come with sufficient quality and a good dealer support network.

　　SoHu:Compared with the spending stimulus policy pushed by government several years ago, in the past two years government has not only canceled the favorable policies, but also issued more purchase restriction policies. In the context of such policy, what kind of measures should auto industry take?

　　Mark Andrews:These policies are a direct response to the congestion being experienced by many Chinese cities. However, if you look at car ownership levels in these cities they are usually still far below that of cities in developed countries. I think part of the reason is the rapid growth in the car market and that there hasn’t been a similar increase in road infrastructure.

　　Ultimately there is little the auto industry can do about this other than lobbying for changes in policy. With better traffic management and improved driving techniques the existing road infrastructure could support a greater amount of traffic. However, it is true that many cities are at just about choking point.