China mulls shutting near-bankrupt automakers

BEIJING -- Chinese authorities are considering the introduction of a withdrawal mechanism to force near-bankrupt automakers out of the bloated automotive industry.

The Ministry of Industry and Information Technology issued a circular on its website Tuesday, revealing that it had decided to set up the mechanism in a bid to advance the core competitiveness and speed up the upgrade and transition of the auto sector.

China is currently home to about 1,300 automobile and motorcycle manufacturers, including 171 car, truck and bus makers, more than 900 specialty vehicle manufacturers, 135 low-speed three-wheeled lorry and farm truck makers, and 120 motorcycle assemblers, according to the MIIT.

However, nearly a quarter of these manufacturers are on the verge of bankruptcy, barely producing anything despite obtaining production approvals from supervising authorities, the statement said.

Some of these companies sell their shell resources to private investors, which are eager to enter the flourishing auto market that has witnessed a fast boom over the past decade.

According to the statement, automobile and motorcycle manufacturers that have already declared bankruptcy or have entered bankruptcy liquidation procedures will be disqualified for production.

Passenger vehicle and motorcycle producers that make no more than 1,000 vehicles annually for two consecutive years, or large and medium-sized bus producers and light and heavy-duty truck producers that assemble no more than 50 vehicles annually, will be ordered to overhaul production. If they are still unable to meet the required standard in two years, they will be disqualified for production.

Industry insiders say the move will block the way for private companies to enter the auto manufacturing business by purchasing the shell resources of those half-alive companies.

"The new rule will push forward the elimination of outmoded capacity in the industry and help realign advantageous resources," said Wang Yuchun, deputy general manager of FAW Car Co Ltd, the auto branch of the Changchun-based FAW Group.

China's auto industry hit the fast track with double-digit growth after the country's ascension to the World Trade Organization in 2001. Its automobile production shot up from 3.25 million units in 2002 to 18.26 million units in 2010, overtaking the United States as the world's largest auto producer for two consecutive years.

However, auto sales growth dropped sharply in 2011 to 2.5 percent from 32.4 percent in 2010 in the face of a slowing economy and the exit of stimulus policies. In the first half of this year, auto sales growth remained sluggish at 2.9 percent amid waning GDP growth of 7.6 percent, the weakest in three years.

The slowing auto market has ushered in concerns that excessive capacity looms large.

The automotive industry in China is currently facing serious overcapacity issues, which will potentially worsen, KPMG China said in a recent report.

It is estimated that the planned auto capacity of China's 12 major automakers will surpass 30 million units, far exceeding market demand, according to the National Development and Reform Commission, the country's top economic planner.

"There is overcapacity in the automotive industry. We will most likely see some consolidation in the industry as a result of overcapacity," said James Chao, Asia-Pacific director with IHS Automotive Consulting.

There needs to be a critical shift from quantity to quality if the Chinese automobile industry is to continue flourishing, KPMG China said in its report.

Lewis Liu, director of Automotive Advisory of KPMG China, said only those automakers with scale, economic efficiency, superior technologies and market-accepted brands are able to participate in international competition and survive, and the rest should be pushed out of the market.

"The government's role should be to recognize the importance of those principles of market development and guide the replacement of outmoded capacities," Liu said.