Almost two decades ago, Western car companies watched uneasily as the Chinese government embarked on a plan to forge a powerful domestic auto industry using technology won through joint ventures with foreigners. Regional governments and companies—a cigarette maker, a liquor distiller, a refrigerator manufacturer—jumped into the market. In one sense, the plan has been a smashing success: China today has more than 70 automakers. But the bottom 55 of those account for just 11 percent of the country’s vehicle sales, according to the China Association of Automobile Manufacturers (CAAM). Ten companies haven’t sold a single vehicle this year.
The government has had enough of the free-for-all. Two years ago officials said they wanted 10 or fewer carmakers to account for 90 percent of vehicle sales by the end of 2011. This year the top 15 producers (both domestic and foreign brands) have 89 percent of the market, according to CAAM. In July, Industry Minister Miao Wei renewed the call for a shakeout in the industry, but the government is now aiming for 2015.
With slower economic growth, rising inflation, and an end to subsidies for vehicle purchases, deliveries to auto dealerships in China are on track to grow only 3 percent in 2011 after surging nearly a third last year, CAAM says. Even industry leaders such as Changan, Guangzhou Automobile Group (GNZUF), and BYD (BYDDY) have seen their domestic sales fall by more than 10 percent this year, CAAM says. Chery, once hyped as a top rival to General Motors (GM) in China, saw domestic deliveries tumble 30 percent in November from a year ago. “Conditions have been unusually fierce this year,” says Wu Song, general manager of Guangzhou Automobile’s Trumpchi nameplate. “Local and foreign brands are increasingly expanding into each other’s territory.”
China’s auto market has surged almost eightfold in the past decade, to more than 18 million vehicles a year. And with about 60 vehicles per 1,000 people—less than half the world average—there’s still plenty of room to grow. Annual auto sales could reach 30 million by 2020, the government predicts.
There has been some consolidation already; the number of automakers tracked by CAAM has fallen from 103 in 2001 to the current 70. Yet with so much potential, even struggling companies are slow to abandon the market. And many provincial officials view auto manufacturing as an important source of jobs, so they don’t want to see them fail. “Local governments are reluctant to let go of any automakers, given that car companies are engines for GDP growth,” says Lin Huaibin, an analyst with IHS Global Insight (IHS) in Shanghai.
Foreign brands today control 58 percent of the passenger vehicle market, up from 55 percent a year ago. Volkswagen (VLKAF) plans to inaugurate a 2 billion yuan ($315 million) plant in 2013 in Xinjiang, the desert region flanking China’s northwest frontier. Japan’s Nissan Motor (NSANY) has a new push to sell cars in inland China. And GM’s November deliveries on the mainland surged 20 percent even as China’s overall car market was nearly flat. “There will be close-quarter combat between the Chinese and foreign brands,” says Zhu Fushou, president of Dongfeng Motor Group (DNFGY), China’s second-biggest automaker, “as competition gets fiercer and fiercer.”