KPMG warns car firms of overcapacity

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Car chiefs are warned today that they are underestimating the amount of surplus manufacturing capacity worldwide - a key determinant of profitability - mainly due to the explosive growth of the Chinese auto industry.

Three-quarters of executives believe overcapacity is now less than 20 per cent whereas the true figure remains about 25 per cent, says KPMG in its annual survey of the global auto industry.

Capacity utilisation is one of the key yardsticks used by car producers to gauge profitability. The rule of thumb is that profits can be made when there is capacity to make no more than five cars for every four bought. But KPMG says the global industry still has the capacity to make four cars for every three sold.

The main reason for continued high levels of overcapacity is the rapid growth of the Chinese car industry, the report says. Nearly four in 10 of the executives surveyed felt there was no overcapacity in China at all. However, a recent report from the investment bank Merrill Lynch puts Chinese capacity utilisation this year at just 65 per cent, down from nearly 100 per cent in 2003.

The Chinese auto market is now the third largest in the world with total sales of commercial and passenger vehicles of 4.4 million in 2003. But penetration of the domestic market remains tiny, at about just 2 per cent, and China has more than 600 car makers and assemblers.

The growth of the Chinese market slowed markedly last year with car sales increasing by only 8 per cent in the third quarter compared with a figure of 75 per cent for 2003 as a whole. Merrill Lynch said that although sales growth would begin to accelerate again this year to about 22 per cent, it would not be enough to prevent an increase in overcapacity. There are very few exports of cars from China.

Mike Steventon, the UK head of automotive for KPMG, said that worldwide, four million units of capacity would need to be removed to bring utilisation back up to 80 per cent. "While a number of vehicle manufacturers have commenced reorganisation programmes to address overcapacity, it is not yet clear whether these programmes will be substantial enough to bring supply and demand back into balance and to drive improved profitability," he said.

KPMG warned that overcapacity would remain a "major issue" for the next decade, particularly in Asia. Mr Steventon said that even with predicted car sales of 3.1 million in China in 2007, less than 60 per cent of its manufacturing capacity would be filled.

Elsewhere in the survey, respondents were increasingly gloomy about the ability of European car makers to hold the line in the face of growing competition from Asian producers, with 25 per cent of executives forecasting they would lose market share. However more than half felt US car makers would grow market share compared with 42 per cent a year ago.