China Success Clouded by Labor Strikes, Overcapacity

You would think in a market where industry passenger-car sales surged 37% in the year's first nine months, there would not be much bad news. But as the literal bull in the China shop, the world's largest vehicle market cannot seem to get out of its own way.

While federal tax cuts and subsidies are spurring China's auto makers to new sales and production records, the central government expects consumer demand to level off as incentives play out, leaving a glut of overcapacity by 2015, when manufacturing capability is forecast to hit 31 million units in what officials expect to be a 25 million-vehicle market.

Some stabilization was apparent in September, with passenger-vehicle deliveries making only a moderate gain on prior-year, rising 19% to 1.21 million units, according to the China Association of Automobile Manufacturers, albeit up from August's 18.7% growth.

Government warnings of danger to the economy if production is allowed to continue unchecked is creating a furor among Chinese auto OEMs currently reaping the whirlwind, while world markets worry the overflow of vehicles will be dumped on them, sparking trade wars.

Yet, many industry analysts argue Beijing's real concern should be the consolidation of the more than 100 domestic auto makers in the country.

But that goal continues to be a moving target as ambitious local governments compete with one another for the strongest car markets.

Beijing has called for consolidating four large national car companies and four smaller firms that would produce 12 million vehicles annually. However, with sales in 2009 soaring 46% year-on-year to 13.6 million units and 17 million expected this year, according to the CAAM, none of the players see the need.

GM China Group broke the 200,000-unit monthly sales mark for the first time in September, rising 15% from year-ago to 208,353 vehicles. Deliveries climbed 19% in August and 22% in July, for a record 1.78 million units in the first nine months. Ford Motor China Ltd. says its JV sales jumped 26% in September to 50,970 units, up 40% year-to-date to 419,073.

The good times have not been lost on the masses, as more rural workers arrive in the cities looking for higher-paying jobs to help them grab their piece of the booming economic pie.

But hope became demand, as China's industrial cash-cow status was challenged in June by labor strikes demanding wage hikes. Toyota Motor Corp., Honda Motor Co. Ltd. and some of their Japanese suppliers in China especially were hard-hit.

A recent report by the nation's official trade union cites government statistics showing China now has more than 150 million migrant workers, with 61.6% between 16 and 30 years of age.

Another survey cited by Reuters reveals 55.9% of young workers plan to settle down in the city where they work.

For now, foreign auto makers don't appear to be changing their strategies because of the strike risks. But observers say the long-term lessons are clear: China no longer is a bargain-basement market for placid workers, and the situation likely will get tougher, especially for foreign companies.

Most OEMs in China follow the country's labor law that says companies need not consider social benefits, allowances and overtime pay when meeting legal minimum wages. But some firms pay beyond the standard.

“China is like every other country in the world,” says Tim Manganello, CEO of parts-supplier BorgWarner Inc., which recently added a multi-million dollar Shanghai technical center to its footprint in China. The country now accounts for 25% of Borg Warner's global business.

Despite China's pressing problems, it's safe to say foreign auto makers are there to stay, having reaped much of the industry's growth over the last decade.

Yet, they speed ahead at their own risk, according to a study by J.D Power, which projects Chinese brands will account for 45% of the country's passenger-vehicle market by 2017.