China's profit-starved home-appliance companies now want to add wheels to their recovery - by entering the lucrative automobile industry.

But the danger is that they could end up skidding in a sector, which has already drawn warnings of overheating from government officials and economic experts.

Midea, one of the country's major air-conditioner makers, has signed an agreement with the local government of Kunming, capital of Southwest China's Yunnan Province, to invest 2 billion yuan (US$241 million) in an automobile project during the next five years.

Midea, based in Guangdong Province, will merge three small bus plants in Kunming into one entity. The project's annual sales are expected to exceed 5 billion yuan (US$604 million) over the next five years.

Midea is also reportedly in negotiations to acquire a bus plant in Central China's Hunan Province; and in talks with Wuling Motor, in South China's Guangxi Zhuang Autonomous Region, to acquire a stake.

"We have a step-by-step investment plan in the auto industry," a senior executive of Midea said.

Sanxing Aux, another air-conditioner giant in East China's Zhejiang Province, aims to have a controlling stake in one of two automobile companies in central Jiangxi Province. The two are Jiangxi Isuzu, Japanese firm Isuzu Motor Co's joint venture producing pickup trucks; and Jiangxi Fuqi, a local light sport utility vehicle producer.

Sources from Sanxing Aux said the firm has formed an automobile preparatory organization headed by chairman Zheng Jianjiang; and will set up a subsidiary specializing in the auto business.

Sanxing Aux is also in negotiations with Nanjing Automobile Industry Corp in East China's Jiangsu Province.

Other companies such as Hong Kong-listed home-appliance giant Green cool, fridge-maker Xinfei Electric and Chunlan have also jumped on the bandwagon.

"The phenomenon is natural as profit margins in the home-appliance sector are very low but remain high in the auto industry," said Liu Shijin, an industry economist with the Development Research Center of the State Council.

"Those companies need to find new profit-growth points. And the auto business is one," Liu told China Daily.

The average profit margin of the home-appliance sector stands at less than 5 percent, compared with 10-20 percent in the auto industry.

Profits of the 14 largest State-owned automakers stood at 23.25 billion yuan (US$2.81 billion) during the first eight months of this year, an increase of 76.70 percent from the same period last year, according to statistics from the State-owned Assets Supervision and Administration Commission under the State Council.

In contrast, profit margins in many home-appliance segments, such as color television sets and air-conditioners, have been shrinking as a result of fierce competition for many years.

For example, the net profit in the air-conditioner segment - which has 400 makers - dropped by 30 percent last year from 2001.

China's home-appliance market has seen overheated investment because the government opened the sector wider to domestic and foreign companies than other industries including the auto industry.

Analysts say the sector's profit margins will continue to fall and more players will turn to other industries in the coming years.

The Midea executive said his company should have diversified into the auto industry earlier, because the sector has "more stable profit margins" than home electronics.

"They (electric appliance makers) will have opportunities in the auto industry as the demand for vehicles in China will grow steadily," he said.

Sales of vehicles made in China are forecast to top 4 million units this year, up from 3.25 million last year.

"At the same time, they will face great challenges as the two industries are different in many aspects and the auto industry is also becoming increasingly crowded," he said.

Jia Xinguang, chief analyst with the China National Automotive Industry Consulting and Development Corp, also has a warning for aspiring entrants: "They should be very careful about entering the industry as it is a typically capital- and technology-intensive sector, and its access barrier is much higher than the home appliance sector."

Government officials and analysts have been warning that the auto industry is becoming overheated as foreign auto giants and domestic state-owned and private companies aggressively speed up investment.

Evidence is emerging of overheating investment and excessive production capacity in the auto industry, despite the projected steady growth in demand over the next two decades.

Official statistics show that tens of billions of dollars have been poured into the industry in recent years.

Of the 31 provinces, municipalities and autonomous regions, 23 make passenger cars. The total vehicle manufacturing capacity will reach 10 million units annually by 2005, according to the China National Automotive Industry Consulting and Development Corp.

Foreign automakers, in particular, are pinning their hopes on China, as the country is the world's only growing major vehicle market.

The world's top nine automakers have already set up one or more vehicle joint ventures in the country. Volkswagen, the largest car manufacturer in China, has announced that it plans an additional investment of 6 billion euros (US$6.8 billion) to double its annual capacity to 1.6 million units over the next five years; and Toyota aims to have 10 per cent of China's total vehicle market by 2010.

A lot of Chinese state-owned automakers, such as Guangzhou Automobile Group and Beijing Automotive Industry Holding Corp, are building new capacity to strive to be the nation's No 4 vehicle group behind the top three - First Automotive Works Corp (FAW), Dongfeng Motor Corp and Shanghai Automotive Industry Corp (SAIC).

FAW aims to increase its annual output to 2 million units within the next five to eight years; while SAIC plans to increase output to 1 million units a year by 2007.

Many privately-owned companies are also raising investment or rushing to enter the industry, including Geely, based in Zhejiang Province, Biyadi in Guangdong Province and Torch Investment in Hunan Province.

KPMG, the international accounting firm, said in a report that surplus capacity in China will reach 900,000 units this year and 2.3 million a year by 2005.

McKinsey, the international management consultancy, suggested that foreign automakers stop massive investment in the auto industry.

"Mounting capacity surplus will escalate price wars and generate heavy waste of resources. As a result, many less competitive players will be phased out or taken over by big groups," Jia Xinguang said.

Automakers, especially those of passenger cars, have resorted to price cuts this year to fight for market share.

China will soon take measures to "make investment rational and prevent redundant construction in the auto industry", said sources from the National Development and Reform Commission, the industry's main watchdog.

These measures will be included in a long-awaited national policy for the industry, to be released later this year, sources said.

Vehicle demand will fluctuate as a result of energy supply, environment and transportation problems in China in the future, sources said.

(China Daily October 27, 2003)