The recent slowdown in China has started to impact carmakers and the potential for more weakness is growing. The fastest growing auto market for the past 30 years is now seeing a small contraction – shrinking by 4 percent in 2018 to a total number of autos at 23.8 million. The 2018 market reverse was the first time since 1990 that the auto industry in China actually shrank, and if the policy makers do not get things right, the auto industry could start to lay off workers in large numbers.
The Chinese Central Bank injected a record $84 billion in open market operations to boost the economy yesterday – likely more to come as an economic slowdown may already be taking place.
One Jaguar Land Rover factory that was producing 10,000 vehicles per month is now working at half that normal capacity, and the slowdown might continue well into 2019.
Is there overcapacity? We think there could be a lot of overcapacity. Ford invested in a $1 billion factory in North China that opened last year while Volkswagen just finished a plant that was scheduled to build 300,000 vehicles a year in Tianjin. Many automakers did not anticipate the slowdown coming and built more capacity, some now doing market research that suggests they bit off more than they can chew. This overcapacity will be the main topic of discussion in 2019 and 2020.
The problems expand for GM, VW and BMW – these overseas firms are now taking in a third to a half of their global profits in China with tie-ups to local brands. So as sales decrease in China, US and European auto makers will come under pressure. Capacity utilization rates fell below 80 percent for some of these auto markers in 2018 after hitting almost 100 percent in 2014, with one firm falling to 60 percent. The auto industry could fall more in 2019 as factories start to run silent, even lower than 50 percent of capacity. And with profits so high in this industry, there could be fall out in other industries as workers have less money to spend on a wide range of products in a domino effect.
This will be a series of article that we will use to focus on China in the coming weeks.