Demand in the world's largest auto market has shifted to a lower gear. China's vehicle sales grew just 5 per cent by volume in 2011, the slowest pace in a decade. Gridlocks and pollution limit growth. Meanwhile, foreign auto makers face two problems: not only are they less welcome in China, but they may soon have to deal with domestic rivals trying to export their surplus.
The market has jogged along briskly until now. The number of cars sold doubled from 2008 to 2010 thanks to government tax incentives and subsidies to help out manufacturers. The result is chronic congestion in the Chinese capital, which has 20 million people and 4 million cars. As complaints about pollution mount, local governments have started to curb demand instead. New buyers must sometimes wait a year for a licence.
Yet production continues. China had 6 million units' worth of unutilized capacity in 2011, equivalent to 40 per cent of last year's sales in China. China is set to build two-thirds of the world's new capacity in the next five years, according to an estimate by KPMG. China's low-cost models won't flood developed markets any time soon, but they may well attract first-time buyers in other emerging markets.
For foreign car makers in China like Volkswagen, it's a double headache. On one hand, they're being edged out. The industry will be removed from a list of official targets for foreign investment starting late January. Worse, China is likely to start exporting its unwanted cars. There's a lot of room to do so too: Even after exports hit a new high of 800,000 in 2011, they make up just 6 per cent of total auto production in China, versus as much as 50 per cent for Korea.
Truck makers have already set a precedent. KPMG predicts that in 2015, one in every five trucks manufactured in China will be made for export. Car makers elsewhere have even more reason to worry, since China's overcapacity is the size of the whole German car market. Before long, vehicles could be China's most controversial export.