It is natural to see a slew of automakers set out to build new production capacity after auto sales in China surged 46 percent in 2009.
Nonetheless, it is also unusual and worrisome that some of them, mainly indigenous brands, are acting as if the market this year is going to repeat last year's explosive growth.
These companies should know the market has its own rule of growth. They should be aware of the risks associated with their reckless expansion.
While global players remain cautious about capacity expansion in China (GM has yet to decide when to add a new plant and the new factory Honda started building last week in the central China city of Wuhan only has an annual capacity of 60,000 units) indigenous players such as Chery Automobile Co. and BYD Auto Co. have moved aggressively to open new plants.
With an annual capacity of 650,000 units, Chery sold some 500,000 vehicles last year. After breaking ground on a 200,000 unit plant in the north China city of Dalian in September 2009, on January 16 the company began construction of another with unspecified capacity in the east China city of Wuhu.
BYD sold about 445,000 cars in 2009. In December, it began building a new plant with a yearly capacity of 400,000 units in the northwest China city of Xi'an. BYD's target for 2010 is to double its 2009 sales.
Sales of minivans across China doubled in 2009. That has sent companies like Chery and Changan Automobile Co. scrambling to build multiple new minivan plants.
All of these ambitious capacity expansion plans are based on the premise that auto sales in China will keep roaring ahead like last year. But the assumption is not rational.
Last year's impressive growth came mainly as a result of the 50 percent purchase tax cut the government enacted for vehicles with engine displacements of 1.6 liters and below.
Now that the government has raised the purchase tax for small displacement vehicles by 2.5 percent points, it is hard to expect the market to grow by the same amount again.
Why? The factors underlying the market's long-term expansion -- most notably China's demographics and its long-term rate of economic growth -- have not changed.
According to China Association of Automobile Manufacturers (CAAM), the average annual growth rate of China's auto market over the past 15 years has been 16 percent. There is no reason to believe that the rate it can sustain now should be any different.
International experiences have also shown that government stimuli can only boost market demand in the short term. After that, the market will calm towards a slower and yet more sustainable growth rate.
If they don't want to be pulled down by debt incurred through reckless expansion, China's indigenous carmakers would do well to bear this in mind.
(Yang Jian)
Nonetheless, it is also unusual and worrisome that some of them, mainly indigenous brands, are acting as if the market this year is going to repeat last year's explosive growth.
These companies should know the market has its own rule of growth. They should be aware of the risks associated with their reckless expansion.
While global players remain cautious about capacity expansion in China (GM has yet to decide when to add a new plant and the new factory Honda started building last week in the central China city of Wuhan only has an annual capacity of 60,000 units) indigenous players such as Chery Automobile Co. and BYD Auto Co. have moved aggressively to open new plants.
With an annual capacity of 650,000 units, Chery sold some 500,000 vehicles last year. After breaking ground on a 200,000 unit plant in the north China city of Dalian in September 2009, on January 16 the company began construction of another with unspecified capacity in the east China city of Wuhu.
BYD sold about 445,000 cars in 2009. In December, it began building a new plant with a yearly capacity of 400,000 units in the northwest China city of Xi'an. BYD's target for 2010 is to double its 2009 sales.
Sales of minivans across China doubled in 2009. That has sent companies like Chery and Changan Automobile Co. scrambling to build multiple new minivan plants.
All of these ambitious capacity expansion plans are based on the premise that auto sales in China will keep roaring ahead like last year. But the assumption is not rational.
Last year's impressive growth came mainly as a result of the 50 percent purchase tax cut the government enacted for vehicles with engine displacements of 1.6 liters and below.
Now that the government has raised the purchase tax for small displacement vehicles by 2.5 percent points, it is hard to expect the market to grow by the same amount again.
Why? The factors underlying the market's long-term expansion -- most notably China's demographics and its long-term rate of economic growth -- have not changed.
According to China Association of Automobile Manufacturers (CAAM), the average annual growth rate of China's auto market over the past 15 years has been 16 percent. There is no reason to believe that the rate it can sustain now should be any different.
International experiences have also shown that government stimuli can only boost market demand in the short term. After that, the market will calm towards a slower and yet more sustainable growth rate.
If they don't want to be pulled down by debt incurred through reckless expansion, China's indigenous carmakers would do well to bear this in mind.
(Yang Jian)