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'China's Detroit' struggles to keep its auto industry afloat

Ford and BAIC Yinxiang factories limp along with government fund injections

As China's car market shrinks, snapping a 28-year expansion streak, many foreign and domestic automakers are struggling with unused capacity.   © Reuters

CHONGQING -- China's slowing car market is increasingly prompting local governments to step in and provide financial support for struggling local and international car companies as Chinese government officials fear the effect of rising unemployment.

At the eye of the storm is the central Chinese city of Chongqing. Long a hub for the production of military equipment, it has promoted the auto industry in recent decades. But after China's car market, the largest in the world, shrank for the first time in 28 years in 2018, "China's Detroit" has fallen on hard times.

Japan's Suzuki Motor has pulled out of a joint venture in the city, while U.S.-based Ford Motor's joint venture with state-owned Changan Automobile Group is cutting jobs at its plant. The slowdown has prompted Chongquing to step in.

In early August, the municipal government even held an event to announce financial support for struggling local manufacturers. Among those present was a senior official from Changan Ford Automobile, who bowed and expressed gratitude for the 143.7 million yuan ($20.2 million) the city was offering.

BAIC Yinxiang Automobile, which is majority-owned by the private company Chongqing Yinxiang Industrial Group, has also suspended operations at its Chongqing plant. At its peak three years ago, BAIC Yinxiang cranked out 260,000 vehicles annually. But the company's sales have slumped due to stiffer competition from foreign automakers, which have cut prices.

Chongqing is also moving to support BAIC Yinxiang by buying a majority stake in the company. The other main partner, state-owned Beijing Automotive Group, or BAIC, which has so far maintained its distance from the joint venture, is expected to chip in.

Chongqing is refunding part of the social security premiums paid by local companies mainly carmakers to help them preserve as many jobs as possible. Including the aid to Changan Ford, the city government has provided around 290 million yuan to 39 companies.

Chongqing's top official is Chen Min'er, the city's Communist Party secretary, who is said to be close to President Xi Jinping. Chen sent Chongqing Mayor Tang Liangzhi, the city's No. 2 official, to the U.S., Japan and South Korea in May. Tang visited companies with plants in Chongqing, including Ford and Hyundai Motor, explaining the city's assistance measures and urging them to continue investing.

Major automakers' plants in China operated at less than 70% capacity, on average, in 2018. As they continue to wrestle with overcapacity this year, the gap between winners and losers is growing. Ford is believed to have fallen to a record low.

According to a survey by U.S. consultancy AlixPartners, Ford's plants in China operated at just 24% of capacity last year, while its unit sales in China fell by half in January to June of 2019, compared with a year earlier, U.K. research specialist LMC Automotive reported. Sluggish sales have hit its factory operations hard. The American automaker "is cutting jobs by more than 20%, including through layoffs," according to a person familiar with the company's operations.

South Korea's Hyundai Motor is also struggling. Its unit sales in China dropped by more than 10% in the first half of 2019 from a year earlier. Its factory in Chongqing, which opened just two years ago, is said to be operating at around 30% of capacity.

The industry is looking sickly elsewhere in China, too. Dongfeng Peugeot Citroen Automobile, or DPCA, a joint venture in which France's Groupe PSA participates, is floundering. The venture's plants in Wuhan -- located roughly halfway between Shanghai and Chongqing -- and Chengdu, in Sichuan province, ran at just 26% of capacity in 2018. DPCA's unit sales further slid 60% on the year in the six months to June.

Only one of its four plants is operating normally and the company has started negotiations to sell or lease the other three, according to a company insider. Some employees are moonlighting as drivers for ride-hailing company Didi Chuxing to make ends meet, the person said.

Many automakers in China now have plant utilization ratios below 70%, compared to 85% in 2010, indicating serious overcapacity. Among them are foreign automakers such as Hyundai, and its affiliate, Kia Motors, and France's Renault. Chinese carmakers with serious idle capacity include Zhejiang Geely Holding Group, the biggest of China's privately owned automakers, Chery Automobile, and BYD, the country's top maker of electric and other "new-energy" vehicles.

By contrast, the Chinese plants of Japan's Honda Motor, Toyota Motor and Nissan Motor are all operating at or above capacity. Although the Chinese auto market contracted last year, car buyers still have an appetite for Japanese brands, which have a reputation for fuel efficiency. Luxury brands also remain resilient, helping German automakers Daimler and BMW keep their plants running at or above capacity.

These bright spots notwithstanding, utilization at auto plants in China could continue to fall overall. The Chinese government has introduced tough restrictions on new plants for gasoline-powered vehicles. Plans to encourage larger manufacturers to buy smaller rivals, or to have smaller manufacturers merge, may lead to still more spare capacity.

Still, China's new-energy car startups could ride to the rescue. CHJ Automotive has bought Lifan Motors, a Chongqing-based private company. Reech Auto Technology Group manufactures electric vehicles at a plant previously operated by a joint venture between China Changan Automobile and Suzuki.

Byton, another electric vehicle maker, has bought a struggling unit of China FAW Group and uses its facilities for production. Nio outsources electric vehicle production to Anhui Jianghuai Automobile Group, a state-owned automaker. Hyundai Motor has said it will make new-energy cars at its Chongqing plant.

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