This September-October 2010 edition of AMS includes a vehicle maker special feature covering what the major OEMs in China are planning with regards to future production. As might be expected, to a one they are planning to add more models – and more capacity. With new plants or additions to existing facilities, Chinese automotive production volumes look set to dramatically increase over the next two to three years.

In light of the strong local market, coupled with the potential represented by various international opportunities, this addition of further capacity would seem to be a natural response, an easy decision. It stands to reason that carmakers want to have sufficient stock with which to supply the expectant customer base. Yet after those customers have driven home, what then of these new plants? Built to supply immediate demand, these are also permanent portfolio additions that could be in operation for many decades to come. Is the Chinese market deep enough to support this extended production model?

Fifty years ago, carmakers in the United States believed that the market would always be there, that it was a predictable constant. Yet even after that demand dwindled (for a variety of reasons), most manufacturers still refused to acknowledge the elephant in the room, otherwise known as rampant over-production from under-utilized plants. Perhaps that over-supply wouldn’t have been such a problem if the financial markets had never crashed, but the resulting shockwave that hit the automotive market in 2008 was amplified due to the failure to proactively reduce volumes.

Circling back around to China, one could argue that any country with such an enormous population could never reach saturation in terms of vehicle sales. Certainly, there are millions of potential customers, yet the vast majority still regard car ownership as a privilege, or simply an unobtainable dream. Little can be done to convert this sector, which means there is actually a rather static number of new car buyers.

When the market started to slide in 2009, the Chinese government quickly introduced an incentive scheme, which as in Europe, brought customers back into showrooms. Would they do it again? The chance is more likely than in any Western country, but how long would Beijing be prepared to support carmakers grinding out vehicles that no one wanted?

As it stands, the Chinese market is in an enviable position; there is a pull on the market for new cars. If that pull suddenly relaxes, even a decade from now, the system must be able to adapt. Right now, the Chinese have the opportunity to put in place such a system, one that doesn’t result in the same elephant in the same room. Growth is good, but prudent growth is better. Chinese OEMs should proceed with caution in terms of building in future volumes.