China will introduce measures to trim overcapacity in auto sector and promote local brands, an industry regulator said yesterday.

Sources from the National Development and Reform Commission said annual sales for all carmakers in China must reach four-fifths of their manufacturing capacity if they want to build plants in other cities.

And all new vehicle companies will be required to produce Chinese brand vehicles, sources said.

If existing carmakers intend to invest in products of different categories from their current offerings, these should include home-grown brands.

Asked whether Sino-foreign car ventures would make local-brand vehicles, an official from the commission said: "Why not?"

The official said these new measures would supplement a national auto industry policy launched last June.

According to the policy, the total investment of any new vehicle project in China should amount to at least 2 billion yuan (US$250 million) and there should be no less than 500 million yuan (US$62 million) spending on research and development.

There has been excessive auto production capacity in China as a result of rapid investment in the sector in recent years.

According to statistics from the commission, current vehicle manufacturing capacity stands at 8 million units a year.

An extra 8-million-unit capacity will be built within the next five years, according to plans revealed by vehicle producers.

But sales of domestically-made automobiles totalled just 5.76 million units last year, up 13.5 per cent from 2004.

The overcapacity has brought down car prices and eroded the sector's profits considerably.

Last year, sector profits dropped by 24.3 per cent to 52.6 billion yuan (US$6.1 billion).

"These new measures represent a warning to carmakers in China," said Matthew Li, a Beijing-based analyst with industry consultancy Automotive Resources Asia Ltd.

"However, conditions are different for different carmakers. Most global automakers, such as Toyota, Hyundai and Ford, lack capacity to meet growing demand in China.

"While the capacity for many less competitive players lies idle," Li told China Daily.

Kenneth Hsu, vice-president of Ford Motor China, said the US carmaker was concerned about overcapacity, but added that his own company could not build cars fast enough.
"We must build more manufacturing capacity in China as our sales are growing rapidly," Hsu said.

Ford and partner Chang'an Motor have lifted annual capacity at their joint venture, based in Southwest China's Chongqing Municipality, to 200,000 units this year from 150,000 last year.

The two parties are also building a new 160,000-units plant in Jiangsu Province in the east.

Hsu said sales of Ford's venture with Chang'an rose by 147 per cent to more than 27,000 cars in the first quarter of this year.

But he declined to comment on the government's new requirements about home-grown brands.

Some foreign automakers have expressed their intention to allow their Chinese joint ventures to produce local-brand vehicles.

Volkswagen said last year that it would help its two car ventures with First Automotive Works Corp and Shanghai Automotive Industry Corp develop local-brand cars if they wanted to do so.

Hyundai's joint venture with Beijing Automotive Industry Corp said earlier this year that the venture would launch a Chinese-brand car in 2008.

However, Li said it would be difficult to push Sino-foreign joint ventures into building local-brand cars as the measure may affect foreign automakers' own-brand sales.

(For more biz stories, please visit Industry Updates)