Overcapacity further exacerbates the need for intervention in the automotive industry.

A recent report from Morgan Stanley, a leading U.S. investment bank, has raised concerns about the Chinese auto industry. The report suggests that an oversupply of production capacity and intense market competition could drive down car prices, profit margins, and investment returns. It even predicts that the Chinese automotive sector might not be profitable in 2006 and 2007, with an increasingly bleak outlook for the industry. This situation seems to indicate that the so-called “glacial period” of 2004 was just the beginning. By 2005, the downward trend in profits became more evident. In fact, this performance wasn’t entirely unexpected. In 2003, China’s vehicle production utilization rate reached 68%, the highest in recent years, prompting many automakers to expand their production capacities. Experts had already warned that with a typical production cycle lasting over 18 months, the utilization rate would drop significantly by 2005. However, the expansion continued without effective control. Government officials are now deeply concerned after reviewing the ambitious plans of major domestic automakers under the “Eleventh Five-Year Plan.” The planned output from key state-owned companies like FAW, SAIC, Dongfeng, BAIC, GAC, and Chongqing Auto (including Changan and Qingling Heavy Duty Truck) alone exceeds 9.3 million units—far surpassing the projected market demand of 8–9 million vehicles by 2010. Behind them are hundreds of smaller manufacturers such as Hafei, Chery, and Geely, further intensifying the supply-demand imbalance. Industry tensions are rising, and some officials are urging the government to take action from the root. While macro-control measures have always been in place, they often fail to address deeper issues. In 2004, the government used both credit and land policies to curb overexpansion, but local protectionism and the dominance of state-owned enterprises weakened these efforts. Experts suggest that what China needs is a balanced approach—combining market mechanisms with strategic macro-control. The idea is to create a system where the market can naturally adjust, while the government provides guidance. For example, when Volkswagen China’s president, Van Andersen, announced that the company would abandon its plan to increase production by 80% by 2008, it showed that companies can respond independently to market pressures. At the same time, the influence of the “visible hand” remains significant. According to Liu Peilin from the State Council Development Research Center, local governments often engage in protectionist practices, such as limiting out-of-town products, favoring local firms, and bypassing national regulations. These actions make it difficult for central policies to take effect. The challenge is how to implement effective measures to reduce excess capacity. Japan, for instance, once bought outdated equipment from companies and then discarded it to encourage modernization. Similarly, shutting down inefficient factories and promoting industry consolidation could help. However, past attempts at rigid administrative controls have often failed. Ultimately, the key is not just to impose restrictions, but to build a sustainable market-driven mechanism under macro-control. This requires a more flexible and systemic approach to ensure long-term stability and growth in the automotive sector.

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