SHANGHAI -- At an automotive conference in Tianjin last weekend, a government official offered a stunning assessment of the Chinese auto industry's stampede to add production capacity.
In 2009, the nation's 30 largest automakers had a combined production capacity of 14 million units, according to the official, who works for the central government's National Development and Reform Commission.
If automakers build the assembly plants that they've announced, their combined production capacity will soar to 31 million units by 2015. The official followed up on this news with a call for measures to "resolutely curb excess capacity in the auto industry."
Given the remarkable growth of China's auto market, sales projections are sometimes little more than wild guesses. But for the sake of argument, let's accept a newly issued government prediction that car sales will grow 13 percent annually.
If so, industry sales will total 27 million units in 2015 -- an impressive total, to be sure, but nowhere near the industry's projected production capacity of 31 million units. Moreover, it is also certain that some automakers will jump in with more expansion plans.
It would be easy to blame the companies for this. But the real culprits are local governments that encourage state-owned automakers to build, build, build.
In China, ambitious city and provincial officials are judged by their efforts to expand the local economy. Given the numerous jobs they create, auto assembly plants are coveted by government officials across China.
To attract new plants, cities and provinces compete with each other to offer free land and even capital to automakers.
Moreover, state-owned automakers can easily borrow from government-owned banks to fund new plants.
Government-backed loans have freed automakers to pursue reckless expansion.
Chery Automobile Co., which is owned by the city of Wuhu in southeast China's Anhui province, is a good example. The company's assembly plants have a combined annual capacity of 900,000 units, yet the company sold fewer than 440,000 vehicles last year.
Normally, an automaker that uses only 49 percent of its capacity would lay off workers and close factories. Not Chery.
Instead, the company plans to build three new assembly plants in Dalian, Kaifeng and Inner Mongolia with a combined production capacity of 700,000 vehicles.
What to do? First, the central government should find out how many assembly plants reported by local governments will actually get built. And if massive excess capacity seems likely, Beijing should crack down on those who helped create this problem -- government officials.