China's auto market fit to burst

As fears of overcapacity in the Chinese car market grow with every expansion announcement, big car makers would only express optimism as they outlined their China plans at the Tokyo Motor Show which opened to the press yesterday and to the public on Saturday.

Executives Volkswagen, Toyota Motor, Honda Motor said they would continue to raise output capacity -- which already exceeds sales on an industry-wide basis -- as they count on explosive economic growth to foster new demand.

China's sales soared 60 percent last year to 1.2 million, making it the world's fastest growing major car market.

But many analysts have warned that the rapid expansion by foreign car makers would lead to a glut soon, threatening to reduce prices and making operations in China less profitable.

Foreign carmakers are planning to spend US$10 billion in China in the next few years to chase exploding demand, even though the Chinese government has decreed that local manufacturers would have half the market by 2010.

Consensus put car sales at around six million units by the end of the decade, meaning foreigners would have to share a three-million market at that point if the government's goal is achieved.

Volkswagen to hold on to its dominant position with about 40 percent of the market, and Toyota Motor, Japan's top auto maker, said it wants 10 percent by 2010 from just over one percent this year -- a target higher than the current share held by number-two player General Motors.

"Because of our late entry, unfortunately, we only have less than two percent of the market now," Akira Sasaki, project manager of Toyota's China division, said on Monday. "But by 2010, we want 10 percent."

If the German auto maker, Toyota and the Chinese government all have their way, that would leave nothing for other foreign car makers.

"Everybody seems to think it's somebody else's problem," said Graeme Maxton, managing director of auto consultancy Autopolis.

"With almost all other industries that entered China, it's always been the same story: foreign companies bring in the technology, Chinese companies take over the market and in the end there's a supply glut," he added.

Maxton that the imminent oversupply situation doesn't take into account any unknown investment plans, mostly from local car makers.

Auto consultants at KPMG's Financial Advisory Services said recently that while car sales jumped 77 percent from January to July this year to 998,000 units in China, capacity is expected to hit 2.7 million units this year.

By overcapacity is expected to rise to 2.3 million units or 90 percent of forecast sales, it added.

In another sign of looming overcapacity, China's State Statistical Bureau said last month car inventories rose more than 60,000 units in the first seven months of the year, a rise never seen in any comparable period.

This left 14 of China's most important car makers sitting on goods worth 22.08 billion yuan (US$2.67 billion), the State Information Center added, without naming the car companies.

Walter Hanek, managing director of Volkswagen Group China, acknowledged that overcapacity and ensuing price falls could be an issue one day, but expressed the industry's mantra that it was more risky not to enter the market.

"We all agree the upcoming opportunity in China outweighs the risks in the near term," he said on Monday.