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Carmakers curb China output as capacity glut swells

Published by Business Insider on Tue, 15 Sep 2015

By Andreas Cremer and Norihiko ShirouzuFRANKFURT/BEIJING (Reuters) - Volkswagen and other major carmakers have begun reining in Chinese production, wages and other costs, industry sources told Reuters, as executives at the Frankfurt auto show put a brave face on a sharp slowdown in the world's biggest vehicle market. The German car giant's Chinese joint venture, FAW-VW, is cancelling staff bonuses and cutting shifts at its plants near Changchun, northeastern China, people with knowledge of the matter said. The bonuses being scrapped typically account for more than half of the assembly-line workers' take-home pay. Volkswagen and General Motors are among the carmakers most exposed to the downturn in China, which has seen demand for new vehicles slow abruptly as a stock market slump compounds the effects of a cooling economy. Demand is also shifting from foreign to domestic brands.While China has accounted for more than half VW's profit in recent years, GM and its Chinese partners risk being wrong footed as they pursue a $14 billion expansion in China. Both have already begun trimming local production -- by around 5 percent in July -- according to one China-based consultant. "The mood is very depressed at VW, BMW or GM," said Clemens Wasner of Austrian automotive consultancy EFS, which advises several German carmakers in Asia.Hubert Waltl, the production chief of VW's high-end Audi brand, said it had also reduced output at its Chinese plants, trimming the work-week to five days from seven in response to lower demand for models such as the A6 saloon.The brand's Chinese facilities were previously "overhea'ted," Waltl told Reuters in Frankfurt late on Monday. Audi chief Rupert Stadler told Reuters TV the company expected "further growth in China over the medium term ... and will not change our investment plans."A GM spokesman said the company's business model in China was "fundamentally different" from most of the other major multinationals, with large investments in a wide array of brands including local ones in segments where sales were still rising.Germany's BMW, the world's biggest luxury carmaker, warned last month its forecasts for this year could be at risk from any further deterioration in the Chinese market, where its sales are falling for the first time in a decade.OVERCAPACITYGM China chief Matt Tsien said in May that GM was determined to keep operating margins as high as 9-10 percent by selling more SUVs and higher-end cars. The company ruled out a significant review of its China plans as recently as July. The U.S. automaker could nonetheless put the brakes on planned capacity increases, a person close to the company said, and has room to trim costs at existing facilities by halting production for longer breaks, reducing shifts and cutting workers' bonuses. "They can immediately reduce extra months of salary payments which are very common in the good times," the source said.Despite weakening sales -- which saw Germany's VDA industry body halve its Chinese market growth forecast to 3 percent on Monday -- the auto industry is adding production capacity for 3.7 million vehicles in the country this year, according to leading forecaster IHS Automotive. With production falling and total plant capacity rising 11.5 percent to 36 million vehicle annually, IHS expects utilization rates to have dropped to 65 percent from last year's 70 percent, viewed as a key profitability threshold. In Frankfurt, where the major German carmakers have built their biggest ever show stands to display luxury car line-ups designed increasingly with Chinese buyers in mind, car executives played down the extent of the slump and its consequences. PSA Peugeot Citroen boss Carlos Tavares struck a similar tone, telling BFM Radio on Monday that the French carmaker still sees "very big growth potential" in China.As part of a recovery plan following a brush with bankruptcy last year, Paris-based Peugeot plans to expand China production with 14 percent-shareholder Dongfeng and eventually begin exports to other Asian markets. Tavares nonetheless added: "As a result of this slowdown there are a number of players who are panicking and cutting prices ... which makes it harder to sell vehicles at a fair price and obviously hurts everyone's business."(Additional reporting by Irene Preisinger, Tilman Blasshofer, Jan Schwarz and Andreas Cremer; Writing by Laurence Frost; Editing by Mark Potter and Ian Geoghegan)Join the conversation about this story
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