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China Doesn't Have Too Many Car Factories, It Has Too Few Good Cars

The global auto industry isn't satisfied that it's actually recovering from the worst period in its history. Executives around the world are now fretting that the system is suffering from excess capacity, especially in China, a booming market. But the problem there isn't too many factories -- it's cars that aren't technologically competitive.

Overcapacity is definitely a thorny problem. A recent KPMG survey of automotive movers and shakers found that an astonishing 88 percent consider surplus production to be a huge challenge for the car industry. But overcapacity is really more of an issue in the developed world, where demand is either unstable or saturated. All those extra factories are in the wrong place: they should be in China and India.

The fear spreads to the promised land
China is experiencing an automotive boom, much to the delight of the world's major carmakers, all of who want a piece of the multi-billion-dollar market. But the overcapacity concern is beginning to color views of the country's vast potential. What if boom is followed by bust? How can China avoid replicating the business failures of mature auto markets?

By obsessing less over how many cars are being build inside its borders and worrying more about the kinds of cars that are being built. Chinese auto industry growth rates are in the low double-digits and should stay there for a while. Sales could spike and decline, but there's an excellent chance that all capacity will at some point in the future either be put to use or so overtaxed that even more capacity will have to be added. It's happened before: in 2009, China's auto factories were running at 120 percent.

Avoid building cars the China Way
As my colleague Jim Motavalli has pointed out, China's car-export aspirations are blunted by the fact that Chinese cars currently aren't that good. Even the vehicles that are produced through joint-ventures with Western companies aren't up to snuff for Western markets. This is not lost on the actual Chinese, as this piece last year from the People's Daily demonstrates:

Dong Yang, the secretary-general of the China Association of Automobile Manufacturers, said it has been proven in the past years that the [National Development and Reform Commission']s worries about the over capacity of the auto industry were all unnecessary. The overcapacity issue is not the most important issue of China's auto industry, he said.

"The most important issue is the industrial upgrade issue. We need to promote our technologies, reduce fuel consumption and pay more attention to environmental protection," Dong said

Maybe then overcapacity will be a problem
Comments like that are heartening because they suggest that China may not ultimately be content to simply provide low-cost labor. Cheap cars would be an easy way to establish its domestic industry, but that could conceivably lead to... true excess capacity. Building out the system so that it leapfrogs rivals and producers a better, greener product -- now that would be a great leap forward.

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Photo: Chinese Buick Factory/GM Media
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