Automakers expanding in China may soon face weakening demand
The new $1.3 billion Cadillac factory on the outskirts of Shanghai is a shrine to modern manufacturing, the kind of facility that automakers all over the world dream of building but can seldom afford, reports The New York times from Shanghai yesterday.
Hundreds of robots bend, arch and twist to assemble the body of Cadillacs new flagship CT6. Lasers seal the cars lightweight aluminum exterior using techniques that the carmaker, General Motors, has only just introduced in the United States. Yardlong, bright yellow robots like mechanical Alaskan huskies tow five-foot-tall carts of auto parts to the assembly line.
Its more along the lines of aircraft technology than traditional, spot-welded steel bodies, said Paul Buetow, G.M.s head of manufacturing in China, as he strode along the assembly line.
The factory is part of an aggressive expansion by automakers in China, the worlds largest market for new cars and the industrys brightest hope for the last 15 years. But the countrys economy is now cooling, which could leave carmakers with too many factories and not enough buyers.
G.M. will open a second, $1 billion factory in Wuhan next year. G.M.s main rival in the Chinese market, Volkswagen, plans to open large assembly plants next year alongside its existing factories in the cities of Foshan, Ningbo and Yizheng and build one in Qingdao by 2018. Hyundai plans to complete a factory south of Beijing by October and another in Chongqing next year, while Chinese automakers like Great Wall and Changan are aggressively adding capacity.
The research firm Sanford Bernstein estimates that auto manufacturing capacity in China will rise 22 per cent over the next two years, bringing it to 28.8 million cars, minivans and sport utility vehicles annually. That is almost equal to the American and European markets combined, and greater than even the most optimistic forecasts: that sales in China will reach about 25 million next year.
Automakers are expanding at a time when Chinas economic growth has slowed to its lowest level in more than a quarter-century. China is closing coal mines across the country and plans to shutter steel mills. Exports are falling. Many Chinese cities are dotted with empty apartment buildings. Worried about pollution and traffic jams, Chinas wealthiest metropolises have begun limiting the number of new cars that may be registered.
On the surface, auto sales in China seem strong. More Chinese families can afford cars and are flocking to showrooms. Sales of cars, minivans and sport utility vehicles jumped 8 per cent last year from 2014.
Automakers have been expanding manufacturing in China as the market there has been booming. Although car sales are projected to rise again this year, the Chinese economy has been slowing down, which could extend to a slowdown in the car market.
The buyers are not just Chinas college-educated, white-collar elite, but also the beneficiaries of the countrys roughly eightfold growth in blue-collar wages in the last dozen years. Zhou Genkou, a burly truck driver, recently waited in a Volkswagen dealership to pay $12,300 for a new white Santana sedan. He explained that he could not tolerate life without a car.
Its so that we dont have to walk, he said.
But there are signs that Chinas yearslong auto boom is easing.
After car sales fell three months in a row, the Chinese government decided last September to halve the sales tax on cars with engines of 1.6 liters or less, to 5 per cent through the end of 2016. The main beneficiaries have been domestic Chinese automakers, mostly affiliated with municipal or provincial governments, that churn out cheap subcompacts with small engines.
A similar tax reduction produced strong sales in 2009 and 2010. But it mainly encouraged consumers to buy sooner. When the tax cut expired, sales essentially leveled off for the next two years.
With the current tax reduction scheduled to end, 2017 will be a very difficult year for the auto industry, probably no growth, said Yale Zhang, the managing director of Automotive Foresight, a Shanghai consulting firm.
Multinationals are focusing more on higher-profit segments that are growing without help from such incentives. But they are also finishing up a factory-building spree that started three years ago, when the economy was healthier.
We see China moving to a pace of what I would call moderate growth, said Matthew Tsien, the G.M. executive vice president who oversees the companys China business.
Volkswagen forecasts that Chinas auto market will grow slightly faster than the overall economy this year and slightly slower than the overall economy for the rest of the decade. G.M. is forecasting that the market will grow a little less than 5 per cent a year through the end of the decade, the equivalent of adding the entire auto market of Japan, or five Australias.
Both automakers are planning to meet much of that growth with factories they have already commissioned or will soon finish. But if the economy weakens significantly, the industry could get stuck with a large amount of excess capacity.
Robots at work in General Motors Cadillac plant in Shanghai. Credit General Motors
