March 15, 2005

Opportunities in China outweigh excess capacity concerns

Shanghai, China – China’s automotive industry will have a major impact on the global automotive market if it can resolve some critical issues, says a report by Ernst & Young.

“Vehicle sales over the last 10 years have proven that China is a huge automotive market,” said Mike Hanley, Global Director of Ernst & Young’s Automotive Practice. “And now with continued governmental support, Chinese vehicle manufacturers are determined to become serious competitors in the global marketplace.”

The report’s main findings were that the Chinese government will maintain a grip on the industry and will continue to support Chinese-owned automotive companies; the market will continue to attract inbound investment, despite concerns of overcapacity; and the Chinese automotive industry will continue to be regulated, with foreign companies having to operate through joint ventures. However, the report also found that commercial forces will put pressure on these arrangements.

The report also said that concerns over excess capacity in China are probably overblown, since all planned capacity will probably not be built, and there will be a competitive “shake-out” as a result of poor investment plans and excessively optimistic sales assumptions. China has started to export cars, but export volumes will rise slowly, due to low quality levels among domestic producers, lack of infrastructure, and the reluctance of foreign companies to export from China. Instead, exports of Chinese-made components will rise more rapidly and have the potential to change the structure of the global industry.

“China remains the fastest growing, and for some the most exciting, auto market in the world today,” Hanley said. “Given the potential scale of the Chinese economy, the scope for success and the need to manage risk are enormous, for both domestic and foreign companies.”

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