China price war continues

Vehicle overproduction -- first warning from central bank

Shanghai. The People's Bank of China is warning about overproduction within the Chinese automotive industry.

For the first time, the Chinese central bank referred to "increased competition within the automobile industry." It stated that this is one of four problems that might lead to structural imbalances within China.

According to estimates undertaken by the auto industry, the number of passenger cars manufactured in China will reach about 2 million units by 2004. But the central bank said there will only be a market for 1.6 million to 1.8 million vehicles by this time.

While market leader Volkswagen is struggling to keep up with demand for its cars in China, total dealer stocks within the industry are growing fast.

According to reports by analysts during the first half of 2003, stocks have grown by 18.6 percent to a value of approximately 21 billion Chinese yuan (2.2 billion euros).

Chinese exports don't compensate for the overproduction, the analysts added. The number of exported vehicles may have risen abruptly by 266 percent in the first half of 2003 -- but that figure is deceptive. The total number of exported vehicles was just 41,000, and only 1,100 were passenger cars.

As a result of the overcapacity, carmakers likely will offer further discounts. In December 2002, analysts predicted average price reductions of 6 percent by the end of June 2003. Prices actually fell by 7 percent and the price war in China probably will increase during the second half of 2003.

Observers of the market situation believe that prices will fall by 7 percent to 10 percent in the full year. For passenger cars alone, a decrease of more than 10 percent is expected.

Ford's Chinese joint venture Changan Ford just announced its third price reduction of 2003. The Fiesta is now 10,000 yuan cheaper than it as at the beginning of the year.

Ford said it was aiming for sales of more than 20,000 Fiestas and Mondeos in 2003. But in the first half of 2003 it sold just 5,882 units.