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China’s shrinking car market is hitting foreign manufacturing groups hard, with some companies operating at a fraction of their potential output, sparking fears a number will be forced to quit the world’s biggest market.
Ford and Peugeot owner PSA have suffered the most, with their factories running well below full capacity at historic lows because of plunging sales after last year’s reversal in the Chinese auto market — the first in almost three decades.
Ford’s plants in China operated at 11 per cent of their potential output in the first half of the year, according to a Financial Times analysis of production data from its joint venture partner Chang’an Auto. Ford’s China sales fell 27 per cent year on year in the first half.
PSA’s plant with Chang’an produced just 102 cars in the first half of the year, according to China’s official auto industry association, meaning capacity use fell below 1 per cent. Its other joint venture with Dongfeng Auto ran at 22 per cent capacity. The group said China sales were down 62 per cent in the first half.
Factories generally need to operate at above 80 per cent capacity to break even, highlighting the extent of the problems facing Ford and PSA, analysts say.
“Some OEMs [car groups] will need to consider their position in this market in the not-too-distant future,” said Robin Zhu, an analyst at Bernstein, predicting “very weak” earnings for major foreign groups in China due to overcapacity.
For some automakers, especially those selling vehicles priced below Rmb150,000 ($22,000), China is “a lost cause”, said Jochen Siebert of consultancy JSC Automotive.
However, Patrick Yuan, an analyst at Jefferies, said overseas groups would try and tough it out. “China’s car market is the largest single market, which is too big to give up,” he said.
China’s car market saw passenger vehicle sales fall 4 per cent to 23m last year. Sales this year have continued to decline, dropping 14 per cent in the first half compared with 2018.
Ford is trying to keep its foothold in the market with plans to launch new models in China to revive sales after suffering a loss of $1.5bn last year.
But there are still concerns that they could follow Japan’s Suzuki, which last year became the first large carmaker to quit the Chinese market in decades.
Ford declined to comment.
Production at PSA’s joint venture plant with Chang’an in the city of Shenzhen has been heavily cut, local business owners said. “There were hundreds of PSA workers living here three to four years ago. Two years ago, many of them took days off for no reason and they left one after the other,” said the owner of a grocery store near the factory.
“We don’t have many orders and production is low,” said a worker who had just come off a shift at the factory, adding that other staff had quit. “They left. They just could not bear to work for the basic salary when the factory did not have enough orders.”
PSA said its Chinese DS Brand was “working on a new strategy to support its strong and long-term commitment to China”.
Even the more successful overseas groups in the Chinese market, such as Volkswagen and General Motors, have been hit.
VW reported a 6 per cent year-on-year sales decline in the first quarter of the year, while sales for GM fell 10 per cent.
Capacity use at GM and VW joint ventures have generally been above 80 per cent. The Shanghai GM joint venture is running at 88 per cent capacity, according to Bernstein.
But it was 77 per cent at VW’s venture with FAW Group in the first half of this year, according to FT calculations.
The problems in China are particularly worrying for these overseas carmakers because the joint ventures, which they must use to produce vehicles in China, have been lucrative.
VW and GM’s Chinese sales accounted for 38 per cent and 23 per cent of the company’s respective pre-tax profits last year, according to consultancy Evercore ISI.
However, sales of premium cars have remained strong this year, with Daimler’s Beijing Benz joint venture running close to 90 per cent capacity while BMW Brilliance is running at 96 per cent, according to Bernstein.
Japanese carmakers such as Honda and Toyota have also performed well, with their joint ventures running at more than 100 per cent capacity due to overtime shifts, it estimates.
The downturn in Chinese car sales, blamed on slower economic growth, new emissions rules and cuts to subsidies for vehicle purchases, has reduced auto sector employment by 5 per cent, or 220,000 jobs, since July 2018, according to official statistics.
Some analysts believe the market has already bottomed out, and could return to growth next year. But growth will probably be close to 1 per cent to 2 per cent compared with double-digit rates seen a decade ago.
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