Will “Chinese Detroit” Manage To Maintain Positive Momentum In Car manufacturing?
The downturn in sales in the world’s largest car market is also affecting places where the car industry is a leading driver of economic growth.
China’s slowing auto market is forcing local authorities to take action and provide financial support to hard-working domestic and foreign automakers, as Beijing looks at the sector with rising unemployment, Nikkei Asia Review reports.
In the eye of the storm is the city of Chongqing. The hub for the production of military equipment has encouraged the automotive industry in recent decades. But after the Chinese car market, the largest in the world, shrunk for the first time in 28 years in 2018, “Chinese Detroit” has fallen out of favor.
The Japanese company Suzuki Motor has withdrawn from its joint venture in the city, while that of Ford Motor and the local state-owned Changan Automobile Group, Changan Ford Automobile, is making a serious layoff. The slowdown in growth in the sector has prompted Chongqing to take action.
In early August, local authorities announced they would support financially affected producers. One of these companies is Changan Ford Automobile, which will receive 143.7 million yuan ($ 20.2 million) in aid.
BAIC Yinxiang Automobile, owned by the privately held Chongqing Yinxiang Industrial Group, also ceased operations at its Chongqing plant. At its peak, three years ago, BAIC Yinxiang produces 260,000 vehicles a year. But sales of the company have fallen sharply due to increased competition from foreign companies that are lowering their car prices.
Chongqing intends to help the company by acquiring a majority stake in it. The other major partner, the state-owned Beijing Automotive Group, which so far maintains distance from the joint venture, is also expected to become involved.
Chongqing refinanced some of the social security premiums paid by local carmakers, mainly to help them retain as many jobs as possible. With the help of Changan Ford, local authorities provide a total of about 290 million yuan for 39 companies.
China’s major carmakers operate on average below 70% capacity in 2018. Although they continue to struggle with overcapacity this year, the gap between winners and losers is growing. Ford production is thought to have fallen to a record low.
According to a study by AlixPartners, Ford factories in China operated only 24% of its capacity last year, while its sales in China halved in January to June 2019, compared to a year earlier. The sales situation strongly affected production operations. The US carmaker “cuts jobs by more than 20%, including through layoffs,” a person familiar with the company’s operations said.
The South Korean Hyundai Motor is also experiencing difficulties. Its sales to China dropped by more than 10% in the first half of 2019 compared to a year earlier. Its Chongqing plant, which opened only two years ago, is said to be operating at about 30% of its capacity.
Many manufacturers in China now have a factory utilization rate of less than 70%, compared to 85% in 2010, which shows a serious overcapacity. These include foreign carmakers such as Hyundai and its subsidiary, Kia Motors, and the French Renault. Chinese carmakers with serious idle capacity include Zhejiang Geely Holding Group, the largest of China’s private car manufacturers, Chery Automobile and BYD, the local pioneer in electric vehicles, and more.
In contrast, Chinese factories of Japan’s Honda Motor, Toyota Motor, and Nissan Motor operate at all or at least most of their capacity. Although the Chinese car market shrunk last year, car buyers still have an appetite for Japanese brands that have a reputation for fuel-efficient vehicles. Luxury brands also withstand the downward trend, helping German automakers Daimler and BMW maintain their larger capacity plants.
The Chinese government has imposed strict restrictions on new gasoline vehicle installations. Plans to encourage larger manufacturers to buy smaller competitors or to join smaller manufacturers can result in even more spare capacity.
