BEIJING (Bloomberg) -- Toyota Motor Corp., Volkswagen AG and Nissan Motor Co. are raising production capacity and sales forecasts in China even as demand growth in the world's largest auto market may slow.
Speculation that the nation will end tax breaks for small cars next year isn't damping the automakers' expansion plans. Volkswagen, the biggest foreign carmaker in China, will invest 4.4 billion euros ($5.9 billion) in plants and new models by 2012, while Nissan aims to boost capacity in the nation to almost 70 percent, the companies said April 23 at the Beijing Auto Show.
The companies are betting the growing wealth of China's 1.37 billion people will ensure continued growth regardless of government policies. While industry analysts say the expansion plans may result in too many factories, automakers risk losing market share if they grow too slowly.
“China's motorization is reaching the masses,” said Takanobu Ito, CEO of Honda Motor Co., Japan's second-largest carmaker. “Even after the tax break ends, demand shouldn't drop very much.”
China's vehicle sales growth this year will exceed Honda's original estimate of 10 percent, Ito said at the auto show. Xu Changming, a research director at China's State Information Center, said last week demand may rise about 17 percent to 16 million vehicles, down from 46 percent last year.
The government is likely to raise the consumption tax to 10 percent next year for cars with engines no larger than 1.6 liters, after cutting the rate to 5 percent in 2009 and raising it to 7.5 percent this year, Xu said. Last year's reduction, which helped Chinese auto demand surge past the U.S. for the first time, resulted in “unsustainable” growth, he said.
Even if the tax break is phased out, “there is a fear that amid all of this investment and stellar growth, the vehicle market could start to overheat,” Paul Newton, a London-based auto analyst at IHS Global Insight, wrote in a research note last week. “The carmakers vying for market share in China may not want to admit it, but this risk is becoming a very real concern.”
General Motors Co., the largest automaker in China, plans to increase sales in the nation to 3 million vehicles by 2015 from an estimated 2 million this year. The company and its local partners sold 1.83 million units in China last year.
“Every time the government changes their policy, it will have some impact,” Kevin Wale, president of Detroit-based GM's China business, said at the auto show. “But the underlying demand is increasing at a very fast rate.”
At the moment, “we don't have enough cars and we can't build enough cars,” he said.
Government policy changes are too unpredictable to be reflected in planning, Toyota's Executive Vice President Takeshi Uchiyamada said at the show.
“The speed of changes to government policies is faster than our development of new engines and new cars,” Uchiyamada said. The company, based in Toyota City, Japan, is basing its strategy on “significantly high” demand for small-engine compact cars, he said.
Toyota's 2010 sales in China may exceed an 800,000-unit target, said Masahiro Kato, president of the company's local unit.
A new Toyota plant in Changchun, Jilin province, will start production in late 2011 or early 2012 and have a yearly production capacity of 100,000 vehicles, he said. The new plant will likely build Corolla vehicles and the automaker may also introduce a new low-cost car in China, Kato said.
Nissan, Japan's third-largest carmaker, aims to raise output capacity in China to 900,000 vehicles a year by 2012 from 535,000 now, CEO Carlos Ghosn said at the show. The company is planning further increases even as Ghosn said industrywide sales growth in the nation may slow to between 10 percent and 15 percent next year.
“Nissan is going the right way,” said Takeshi Miyao, an analyst at auto consulting company Carnorama in Tokyo. “It's important for each automaker to gain share now. Later is too late.”
The Yokohama-based automaker, which will begin selling its Leaf electric car in China next year, aims to boost sales in the nation 12 percent this year to 850,000 vehicles.
Winfried Vahland, head of Wolfsburg, Germany-based Volkswagen's China operations, estimates the Chinese auto market may grow between 15 percent and 20 percent this year, compared with the company's previous estimate of 10 percent to 15 percent.
“We're a bit more optimistic now” than at the beginning of the year, Vahland said.
The company, which plans to add production capacity at its Nanjing and Chengdu plants in China, aims to match or exceed market growth this year, Vahland said. It will reach a sales rate of 2 million vehicles a year in the nation “far earlier” than its 2018 goal, he said.
Norbert Reithofer, CEO of BMW AG, said an end to tax breaks for small cars won't affect local growth plans for the Munich-based company, the world's biggest luxury carmaker.
“We will expand very dynamically in China even if the government takes that action,” Reithofer said. Capacity expansion “will always” lag sales growth, he said.
BMW intends to deliver 120,000 BMW, Mini, and Rolls-Royce vehicles in China in 2010, a 33 percent increase from last year and 20 percent more than a previous projection, he said at the Beijing auto show. The company and its rival Daimler AG, which aims to raise local sales by around 40 percent to at least 100,000 vehicles this year, are rolling out sedans developed exclusively for Chinese buyers.
Hyundai Motor Co., South Korea's largest carmaker, is adding a third plant in China that will increase its local capacity by 50 percent to 900,000 vehicles a year by 2012.
The foreign automakers' expansion plans are matched by their local counterparts. Beijing Automotive Industry Holding Co., the carmaker that bought technology from Saab Automobile, is building three passenger-vehicle plants, two commercial- vehicle factories and one engine factory, adding 1.3 million units of production capacity to ease a shortage, President Wang Dazong said in an April 22 interview in Beijing.
Beijing Auto expects to boost sales 21 percent this year to 1.5 million vehicles, Wang said. The company's deliveries surged 61 percent to 1.24 million last year.
Zhejiang Geely Holding Group Co., which bought Sweden's Volvo Cars last month, aims to build a Volvo factory in China, according to the company.
Concern that automakers' investments would lead to too much production capacity in China have been proven wrong before. Nissan's Ghosn and Volkswagen both said in 2003 that overcapacity in the nation was a concern. At the time, Honda predicted China's auto sales might exceed 10 million in 2010.
Still, excess inventories may force carmakers to offer incentives to buyers as early as this year, and the companies may suffer from overcapacity within five years, according to JD Power & Associates.
‘Cash in the Trunk'
With the surge in factory investment, JD Power estimates local plants may produce at 66 percent of capacity by 2015. An 80 percent level is traditionally required to cover fixed costs, according to the company.
Carmakers will offer incentives, eroding their profit, as vehicle sales growth in the nation may slow this year to about 12 percent, Finbarr O'Neill, president of JD Power, said in an April 20 interview in Beijing. Industrywide sales may total 14.5 million vehicles this year, he said.
“We see a pile-up of inventory at dealerships and actually a decline in transaction prices,” he said. “When you have too much inventory on the ground, you have to put cash in the trunk.”