Overcapacity will be a major factor in the Chinese motor manufacturing industry in the next two years, according to auto industry consultants in KPMG's financial advisory services. Paul Brough, managing partner, said annual vehicle sales had grown to 3.3m units from 1.4m over the past eight years and were expected to grow annually at 8 per cent until 2015. However, capacity is expanding at an even faster rate as foreign firms rush to take advantage of the opportunities in one of the industry's few growth regions. While car sales in the first seven months of this year totalled nearly 1m units, giving a forecast for the whole year of 1.8m, capacity within China is expected to hit 2.7m units. The report said overcapacity in the market could hit 1m units in 2003, rising to more than 2m units by 2005.
Oversupply is already producing price cuts – average car prices in China fell 7 per cent in the first half of this year. Further increases in capacity would add to pressure on prices and thus on margins, so that some of the new production facilities would have to be scaled back to match market realities.
Brilliance China Automotive Holdings sold just 1,186 Zhonghua-branded sedans in August, down 46 per cent on the July total. Company chairman Wu Xiaoan said the fall was due to "an unreasonable level of distributor inventory" and a restructuring of its distributor network, as the group shifts its sales focus to secondary cities.