SHANGHAI (AdAgeChina.com) -- The buzzword in China's auto industry these days is capacity expansion -- one automaker after another has announced plans to expand existing plants or build new facilities.
It's a tempting strategy in a market where car sales grew 50% in 2009 and 67% so far in 2010, but some of these plans have obviously gone too far. This week alone, six automakers announced plans to expand production.
To be sure, some companies are struggling to keep up with demand. With an annual production capacity of 360,000 units, Guangqi Honda Automobile Co., a joint venture between Honda Motor Co. and Guangzhou Automobile, sold 365,000 cars last year.
SAIC-GM-Wuling Automobile Co. a joint venture between General Motors Corp., Shanghai Automotive Industry Corp. (SAIC) and Liuzhou Wuling Motors Co. in Liuzhou, Guangxi, has an even more severe bottleneck. Despite its capacity of merely 590,000 units, the joint venture somehow sold more than one million minibuses last year.
Likewise, Geely Automobile can legitimately argue that it needs more capacity in China's vast western market, and Volkswagen Group faces the same problem in southern China.
But it's tough to justify the overly ambitious expansion plans of Chery Automobile Co. and Great Wall Motor.
Chery's web site claims that the combined capacity of its existing assembly plants has reached 900,000 units. Yet the company sold fewer than 440,000 vehicles last year, which means it was using 49% of its capacity.
To put that in perspective, analysts generally argue that an automaker must use at least 80% of its production capacity to make money.
Yet Chery is building two new plants in the northeast port city of Dalian and the northern city of Kaifeng. Their combined capacity will be 400,000 vehicles. As if that weren't enough, Chery also plans to locate a plant in Inner Mongolia with a production capacity of 300,000 vehicles.
Great Wall also dreams of glory. The company says it has a current capacity of 500,000 units, but it sold less than 230,000 vehicles last year. Nevertheless, it announced a plan this week to raise the capacity of its plant now under construction in the northern port city of Tianjin to 600,000 units.
In China's fast-growing market, an automaker can argue that it must grow to take advantage of economies of scale. But Chery and Great Wall are acting as if last year's explosive sales growth will never end -- and their expectations are too high. China's red-hot market is starting to cool off. Industry sales rose a stunning 72% year-on-year in the first quarter, but only 39% in April 2010.
Inventories are building up at dealerships, especially those selling domestic Chinese brands, according to the China Association of Automobile Manufacturers.
China's market is easing towards lower and more sustainable growth. It's time for Chery and Great Wall to reconsider their expansion plans.