Why China's State-Owned Companies Make More Cars Than They Can Sell

China Changan Group Can Make 700,000 Vehicles a Year, Sells 15,000

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Overseas observers often fret about overcapacity in China's auto industry.

But the problem afflicts few foreign automakers or private Chinese companies. At least three state-owned automakers, though, have amassed huge surplus capacity and are in no hurry to reduce it.

Why? Because the state-owned companies have no reason to align output with demand. They subsist on government subsidies and profits generated by their joint ventures with foreign automakers.

State-owned China Changan Group Co. is in the worst shape. Two of its subsidiaries, Hafei Automobile Industry Group Co. and Jiangxi Changhe Automobile Co., can build as many as 700,000 small cars and microvans, yet they sold only 15,000 units last year because of bad management and poor quality.

Chery Automobile Co., China's largest vehicle exporter, has four assembly plants with a total capacity of 900,000 vehicles. Yet it sold fewer than 500,000 units last year.

Other state-owned companies are in bad shape, too. FAW Car Co. could produce 400,000 vehicles annually, but it sold only 205,000 cars last year.

If these automakers were private, none could survive. But because they are state-owned, they enjoy close ties with local governments that favor them with huge subsidies.

Take Chery. Operating far below its capacity, the company has lived on government subsidies of $65 million a year. Likewise, Hafei and Changhe receive local subsidies from Heilongjiang and Jiangxi provinces. They also are propped up by the Changan Group, which gets financial support from the central government.

State-owned automakers also have been kept alive by their joint ventures with foreign automakers. FAW Car, for instance, has suffered huge losses over the past year. But its corporate parent rakes in profits from joint ventures with Volkswagen and Toyota.

In addition to the big state-owned automakers such as Changan or FAW, dozens of small state-owned automakers make very few vehicles. They all survive on local government subsidies.

Keeping these inefficient automakers alive eats up taxpayers' money. But China is not a democracy. The government can use tax revenues to keep these companies alive as long as it wants.

--Automotive News China--

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