Over 80% of Auto OEMs Faced With Overcapacity, Expert Says OEMs Must be Warned About Industry’s Cyclicity
Author: XIANG Xiufang/Caijing
Over 80% of auto OEMs are faced with production overcapacity
Automotive industry has fallen into a vicious circle. On one hand, over 80% of auto OEMs have issues with low utilization rate, while on the other, part of NEV OEMs continues to expand production capacity.
Dramatic changes in the market caused entire automotive industry to slow down, while resources started to concentrate in the hands of the leading companies, which in return made overcapacity issue escalate. Part of automotive market quickly reacted with sales and market share growing in spite of trends, which then made them further expand production capacity. At the same time, EV startups also sped up production expansion.
Recently, NDRC ordered survey into NEV investments as to see what is going on with local NEV investments post-2017. This sounded an alarm bell for the entire automotive market. Experts think that production expansions should be done cautiously and that automotive market should be reminded of its cyclic nature.
Utilization rate of personal vehicle production capacity is below 60%
Based on CPCA reports, as of Dec 31st 2019, available personal vehicle production capacity was at 39.905M. Beside this capacity, in the next one to two years, another 9.06M are expected to be put into operation, while there is another 3.8M among 15 OEMs that are waiting for production licenses.
CAAM data shows that last year’s personal vehicle sales were 21.444M, -9.56% YoY. This means, 2019 personal vehicle production capacity utilization rate was 53.7%, while in 2017 it was 66.6%.
CPCA calculated 2019 sales by 128 OEMs — 21.554M sales made 54.01% utilization rate. Among them, only eight companies had the rate above 100% — Toyota, Honda, BMW, Mercedes Benz and Nissan’s JV brand. Their sales recorded growth last year.
Seven companies had a reasonable utilization rate at 80%-100%, including FAW-VW, SAIC-VW, SAIC-GM, etc. Their sales made 29% of 2019 sales.
SAIC, Geely, Great Wall, SGMW and Cherry had utilization rate at 60%-80%. They had a slight overcapacity. These companies currently make the leading echelon of Chinese domestic brands.
But there is over a half of companies with utilization below 40%. For example, JAC PV designed production capacity was at 450K as of 2019 end. Production capacity in the reported period was 168.6K, production capacity was at 37.47%. Haima sold less than 30K units in 2019, while its annual capacity could make over 800K.
Among Sino-foreign JVs, Beijing Hyundai production rate has been below 50% for several years now. Its capacity once reached 1.65M, while in 2019 it sold 716K units, lowest in the past three years. This year, Beijing Hyundai is after 750K sales target, i.e. less than 50% of its production capacity.
Absence of auto OEM market forecasts pulled down the overall profits
Automotive analyst, REN Wanfu, says that low utilization rate and consequent losses in part of OEMs was due to them being overly optimistic about the market developments as they did not make enough forecasts.
2010–2017, Chinese personal vehicle market was growing. In those years, 2018 Chinese personal vehicle sales were estimated at 25.59M, +3% YoY.
Because of market optimism, majority of the companies made pretty extreme production plans prior 2017.
Before and after 2012, Sino-foreign JVs’ production utilization rate was around 80%. Afterwards, JVs such as Beijing Hyundai, Dongfeng-PSA, Chang’an-Ford started to increase production. For example, Dongfeng-PSA increased total capacity to 840K from 400K in 2012. However, when it came to sales, above mentioned companies recorded falls, which caused utilization rate to drop below 50%.
Changes in the entire auto market, aggravated overcapacity
Since 2018, Chinese personal vehicle market has been falling for two years. In 2019, PV sales were at 21.444M, -9.56% YoY. This year, the market is affected by the outbreak and the sales are still falling. CAAM numbers show that Jan-Oct PV sales were at 1.531M, -10.1% YoY.
CMB International Research Department’s BAI Yiyang says that overcapacity caused the profitability of the entire industry to fall and sales end competition to increase, while low supply end production capacity made impossible to raise operating leverage. He pointed out that excessive investment by some companies impaired assets bringing the profit down.
Objectively speaking, the outbreak accelerated clearing of underperforming companies. We have also seen that some companies declared bankruptcies, Bai said.
In the past two years, FAW-Xiali, Zotye, Lifan, Hawtai, Leopaard and Brilliance were either marginalized or bankrupt or bought. Dongfeng-PSA, JAC PV managed to tap into cash by transferring idle factories. Beijing Hyundai has temporarily closed part of its factories, cut part of employees and reduced operative and management costs.
Experts: Auto OEMs must be warned about cyclicity
In contrast, part of leading companies and EV startups are still expanding production capacity. Only this year, Great Wall bought entire production base and welcomed a new factory. It bought Hubei Jingmen production base to manufacture SUVs and pickups. On November 24th, a 100K/year factory in Jiangsu started production, while the company is building another one in Zhangjia Port. Great Wall will have nine production bases in China with over 2.5M unit capacity. Great Wall 2019 sales were 1.06M, Jan-Oct at 816K.
Toyota and Honda are expanding production capacity with plans to increase the capacity in China to 2M. These two companies have scarce capacity at the moment, while the sales continue to increase, so the expansion is reasonable.
EV startups such as NIO, XPeng, Weima and others all have production capacity expansion plans. Baoneng and Evergrande plan 1M unit capacity.
NIO founder, LI Bin, says that it is in talks with its partner (JAC) about further production capacity increase. In January they plan to increase production capacity to 7.5K/month. Jan-Oct, NIO sold over 30K units and it hopes to sell 40K by the year end.
XPeng is already planning the second factory. Its Zhaoqing factory 1st phase started production in June this year, planned capacity is 100K-150K/ year. XPeng took RMB 4B this year by Guangzhou government to build the second factory there, which should start working in 2022 with 100K/year capacity.
In the first ten months of this year, XPeng sold 17K units, Zhaoqing can comfortably meet the current needs.
Weima currently has two production bases. Public data shows its production capacity can reach 250K, while its sales this year were less than 20K. Also, Evergrande and Baoneng did not even started mass production, but have already bought land to build plants with 1M capacity.
BAI Yiyang says, auto OEMs can appropriately plan the capacity ahead, but they should be aware of cyclic nature of the auto market as to avoid being dragged by the overcapacity at the end of the cycle.