Traditional Auto Firms Face Overcapacity as EV Market Blooms
Over the past two years, a steady decline in the capacity utilization rate among traditional automakers has become an intensifying industry-wide trend, due to the rapid development of the new energy vehicle market. Outdated production lines are struggling to adapt to the advanced production techniques used to manufacture NEVs.
According to the China Passenger Car Association (CPCA), by the end of 2021, the country’s passenger car production capacity totaled 40.89 million units, and the capacity utilization rate was 52.47%, compared to less than 50% in 2020.
Nearly half of the industry’s production capacity is reportedly idle, and more than 10 million units will be put into production in the future by qualified companies. According to this rate of expansion, the capacity utilization rate of the automobile industry in the future is still likely to decline. A number of automobile industry insiders told Jiemian News that overcapacity in fuel car industry will be increasingly serious.
The capacity utilization rate of SAIC Motor, GAC Group, Dongfeng Motor and other Chinese fuel-powered vehicle giants is in continuous decline. The capacity utilization rate of SAIC declined for two consecutive years after 2019, from 87% to 74%, Dongfeng Motor’s fell from 87% to 79%, and GAC’s fell from 77% to 73%.
Capacity utilization has also had an impact on gross profit margins. From 2019 to 2021, SAIC’s gross profit margin decreased from 12.15% to 9.93%. GAC’s gross margin has been relatively low in recent years, at 6.9%, 6.47% and 7.92% from 2019 to 2021, respectively. In 2021, Dongfeng’s gross profit margin was 12.6%, down 1.9% from 2020.
Cui Dongshu, the secretary-general of the CPCA, said the utilization rate of 70 to 80% is reasonable. If the number exceeds 90%, it means capacity is tight. Under these conditions, automakers must work very hard in the off-season to get ready for the peak season. In general, even after the decline, the capacity utilization of the above-mentioned manufacturers is still in a reasonable range.
In recent years, sales of fuel-powered vehicles have fallen by about 25% from 23.65 million units in 2017 to 17.8 million units in 2021, according to the CPCA. During this period, sales of new energy vehicles increased from more than 700,000 units to more than 3.5 million units – a four-fold increase.
As the market gradually shifted to new energy models, traditional manufacturers have begun to accelerate their transition. They will surely want to revamp production lines originally designed for fuel-powered cars in a manner that will save time, while also reviving some spare capacity, industry insiders said.
But the actual transformation is not easy. Months of production line transformations are difficult to bear for any car manufacturer. In the first half of this year, Tesla halted production due to pandemic-induced lockdowns in China, resulting in a cumulative loss of 44,000 vehicles in 22 days, which is about half of sales volume of Chinese EV startups in 2021.
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Therefore, in order to reduce losses caused by the production line transformation, automakers generally will carry out transformation in batches during the offseason to maximize the use of idle capacity.
In order to curb overcapacity, the National Development and Reform Commission issued an investigation into new energy vehicle projects in November 2020, and specifically pointed out that Baoneng Auto and Evergrande Auto, two automakers that originated from real estate agencies, are still in deep trouble this year. In recent years, relevant departments have become more and more strict in their approval of car production qualifications. Li Auto and XPeng have had to purchase other firms that already obtained such qualifications.