Government warnings are growing about excess production capacity in China's auto industry in the years to come as a result of feverish construction of new facilities by automakers.

Chen Bin, an official from the National Development and Reform Commission (NDRC), China's top industry planner, recently said that many vehicle producers, encouraged by the ongoing rapid growth in the domestic vehicle market, are adding investment to considerably expand production.

"This is a symptom of overcapacity," Chen said. "With the effect of the government's incentive policies diminishing and mounting environmental pressures, the pace of domestic market growth is likely to slow and new production capacity will be idle in coming years.".

According to NDRC projections, less than 70 percent of nationwide vehicle production capacity will be in use by 2013 if controlling measures are not taken, he added.

Overall vehicle production capacity in China will exceed 16 million units next year, according to market data.

Domestically made vehicle sales jumped by 29.18 percent year-on-year to 8.33 million units in the first eight months of 2009, making China the world's biggest vehicle market, according to the China Association of Automobile Manufacturers.

Total sales this year are predicted to hit 12 million units, up from 9.38 million units in 2008.

Due to robust market growth, nearly 80 percent of vehicle production capacity in China is utilized this year, which a "normal level", Chen said.

In January, China cut the sales tax on vehicles with engine capacity less than 1.6 liters to 5 percent from 10 percent to stimulate demand. The central government also plans to supply a total of 5 billion yuan ($732 million) this year for vehicle subsidies in rural areas.

German carmaker Volkswagen Group announced last week that it planned to spend 4 billion euros ($5.9 billion) to expand capacity of its plants in Nanjing and Chengdu to 300,000 units and 350,000 units a year respectively.

Last month, General Motors and China's FAW Group formed a 50-50 joint venture with a total investment of 2 billion yuan to make light-duty trucks. The venture will have a production capacity of 200,000 units a year.

Italian carmaker Fiat Auto SpA in July created a joint venture in Changsha with Guangzhou Automobile Group to make passenger cars in 2011 with an initial production capacity of 140,000 units a year.

Chen warned that carmakers should keep "sober-minded" and not blindly expand production capacity for conventional vehicles.

"What they should do is to to put more investment in R&D and production of energy-saving, environmentally friendly and new-energy vehicles," he stressed.

He added that the government also encourages consolidations, mergers and acquisitions between domestic automakers to complement product lines.

Yet industry insiders and analysts don't view overcapacity in the auto industry as a serious concern.

Dong Yang, vice-chairman of the auto association, said the market has a growth rate of more than 20 percent, so an overcapacity ratio of 30 to 35 percent is needed.

Yale Zhang, director of Greater China Vehicle Forecasts for the US auto industry consultancy CSM Worldwide, said "the government's early warning is necessary for a sustainable and healthy development of the industry, but any indiscriminate administrative measures to curb new production capacity are not welcome".

What is needed, he said, are measures to prevent carmakers with low utilization of existing capacity from building new plants.

(China Daily September 21, 2009)