By on April 14, 2011

“We can’t make cars as fast as they sell in China,” said an old friend of mine last night on the phone from Wolfsburg. He works at Volkswagen, the company that fights with GM for the title of King of the Middle Kingdom. I wanted his opinion on the sudden reduction in Chinese car sales. His answer? “What reduction? We are building three new factories in China, and we better get on with it.” He is right. If they don’t hustle, the competition will pour concrete faster than Volkswagen does.

When China’s Association of Automobile Manufacturers announced only 8 percent growth for the first quarter of 2010, and a paltry 5.36 percent in March, many observers worried about an end of the Chinese car boom.

China’s automakers and their overseas partners are worried about the opposite. They don’t have enough capacity. Indeed, part of the reduction in growth stems from not being able to keep up with the demand, especially in the bigger bore segments, where the joint ventures reign.

Indeed, Volkswagen had been capacity constrained for all of last year. Still, they managed 19.9 percent growth in the first quarter in China, says Reuters. Where did they find all those cars? Volkswagen is building two new car plants in China, in addition to a new wholly-owned factory for transmissions. Volkswagen is betting big on China and wants to double its production capacity in China to three million and more vehicles by 2013/14.

Volkswagen is not alone. Many other large joint ventures hit their own Limits to Growth last year and decided to do something about it.  “China’s top 12 carmakers plan to boost their annual output capacity to a combined 39 million vehicles in 2015, 140 percent more than their sales in 2010,” writes The Nikkei [sub] today.

  • SAIC expands its capacity to 6 million units, up 70 percent from its 2010 sales. The expansion plans include plants built with joint venture partners Volkswagen and GM.
  • Dongfeng wants to increase output of its joint-venture plants with Nissan and other automakers by 80 percent to 5 million cars a year.
  • FAW, partner of Volkswagen and Toyota wants to raise its capacity to 5 million units annually.
  • Changan, joint venture partner of Mazda, Suzuki, Ford, and PSA, wants to raise its capacity to 5 million units annually.
  • Geely, owner of Volvo, is aiming for a fivefold increase to 2 million cars.

China has some 120 carmakers, the exact number is unknown. Says The Nikkei: “With production hikes planned by midsize makers, some analysts estimate total capacity in China will rise to 40-50 million vehicles a year by 2015.

Did China’s factory builders go insane?

Not really, if we take a sober look at the numbers. In the year 2000, 2 million cars were sold in China. Just ten years later, 18 million new cars changed hands. That’s a growth of 800 percent. In the ten years, growth averaged 24 percent annually. There were years with 48 percent growth and years with just 5 percent growth. There is no real pattern.

If we assume only 15 percent average growth for the next 10 years, then we will be at 36 million cars in 2015, and at a whopping 73 million cars in 2020. But won’t the market be long saturated by then?

Not at all. By industry convention, a market begins to show signs of saturation at 500 cars per thousand people. The U.S. boasts more than 800 cars per thousand. Now that’s one saturated market. The G7 average is over 600 cars per thousand. Poland raced from cars for functionaries only in 1990 to 450 cars per thousand average people today. Russia already stands at 225 cars per thousand. And how many cars does China have today?

63 per thousand, says my database. Some think it’s less. 63 cars per thousand stands for a market that sucks up cars like a dry sponge. And it does, as we saw last year.

Let’s continue running the numbers. Generously assuming that a Chinese car lasts 15 years, and applying a sedate growth rate of 15 percent annually, we will have just 154 cars per thousand by 2015. In 2020, when 73 million cars are sold, we will have only 329 cars per thousand, still far away from saturation. I’ll spare you the rest of my model, it is frightening.

In my more than 30 years in the business, I learned three golden rules:

  1. Market saturation starts at above 500 cars per thousand.
  2. A market starts buying cars when per capita GDP crosses $1,000
  3. Don’t get confused by single years or single quarters

Suddenly, the expansion programs of the top 12 Chinese automakers, which – according to the Nikkei – hold an aggregate market share of 90 percent, make eminent sense. The expansion plans of the bottom 108 automakers don’t make sense at all, but there is a Darwinian reason why they are at the bottom. At some point, their capacity will be bought by the surviving companies for pennies on the dollar, or rather for fen on the yuan.

Won’t China choke on the traffic?  China already has an expressway system of 74,000 kilometers, second in size only to the United States. If that surprises you, then you are excused: About half of that system was built in the last five years. In the next five years, China will build another 10,000 km, for a total world record length of 85,000 km. In addition, China already has the world’s longest high speed rail network.

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8 Comments on “China Hits Limits To Growth: Not Enough Car Factories...”

  • avatar

    “Geely, owner of Ford, is aiming for a fivefold increase to 2 million cars.”

    Geely owns Volvo Cars.

  • avatar

    Bertel, our total fleet is 10 to 18 million depending on who you ask. Our population is 190 million. Where does that put us vis-à–vis China?

    Alternatively, in my home town there are 1 million cars registered. The population is 2.9 million. Saturated yet?

    BTW, GDP per capita hovers between 3000 and 5000 dollar annum (again depends on who you ask). Is that enough?

    More to the point, my city is relatively rich. Are people with means too concentrated in cities like mine to make the Brazilian market potential smaller than China’s? I mean, if my hometown market is saturated, I bet that in my home state countryside the number is much smaller. Our state fleet would be 3-4 million for a pouplation of 18 million. Comparing to my hometown the capital, the market is huge. However, is there money there?

    Would the same analysis apply to China?

    Thanks in advance.

  • avatar

    Absolutely. In all respects same ballpark as China. That’s why everybody predicts explosive car growth for Brazil. The money will be there. Use another industry trick: Try to find the number of two wheelers and (if the exist) 3wheelers. They will convert immediately into cars when they can afford it. In China, the total of cars, two and three wheelers bought per annum is  around 50 million.

    Statistically, you hometown is good for another 500,000 cars, but the rule does not work on a city level. It’s a macro average.

    • 0 avatar

      Thanks Bertel! Last year I think was the record for motorcycles, too (no 3 wheelers). 2 or 2.5 million. Traditionally they sell less than cars. But their numbers are growing even faster than cars. Possibly they’ll pASS cars ina 3 to 5 years horizon

      • 0 avatar

        A bit south of you, Chile, motorcycles are a seasonal trend. Every 10 years or so, they grow explosibly, normally after a high gas price time. In one or two years its full of bikes and everybody seems to be willing to dump their cars and go to work on a 50cc scooter.

        Then people start dying. Authorities admit 60% of the motorcyclist dont even have a licence and have never had proper training. New regulations come into effect. Motorcycles stop being sold. Importers go under. Cars reign again.

        2008/9 was the last peak. We are now in the final stages of the cycle. In another year or two, motorcycles will again be cheap to buy used and nobody will care about bikers for another decade.

  • avatar

    I was at a Peugeot presentation yesterday at the Wanda Sofitel and they estimated that the chinese market would hit 35Mo cars per year by 2025 and accounts for more than 30% of global sales; a much more conservative estimate than yours.
    Also to put equipment rates in perspective, they provided Beijing’s equipment rate which stands (according tothem again) at about 250 cars per 1000 inhabitants.

  • avatar

    Correct me if I’m wrong Bertel,
    but isn’t the entire world buying about 55-60 million cars per year currently?
    Would China alone to buy 73 million cars – 9 years from now only – where would all the needed oil come from?

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