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China's Auto Production Slump Hurts Manufacturing Sector, the Backbone of the latter in China

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Published on : Oct 12, 2015

Despite strong retail sales of consumer goods in China, manufacturing in China is plagued by cutbacks in production and excess capacity. 

The trend is most obvious in the domestic automobile production in China. Some time ago, the automotive sector in China was a benchmark for China’s economy, which was driving growth in jobs and fulfilling the insatiable demand for vehicle ownership from the middleclass. Today, however, the automotive sector is manifested as the manufacturing sector malaise.

China, in spite of being the world’s largest auto market by volume has been facing headwinds since the beginning of the year. In the first half of 2015, gross auto sales rose at the slowest rate in more than six years. 

But, the July stock market crash dented the wealth of a myriad middle class Chinese, which was the main target for domestic automakers in China. As a consequence, in July, the Association of automobile Manufacturers in China was forced to slash the sales forecast of vehicles in 2015 by more than half, which is a mere 3% from 7% forecasted earlier.

As a repercussion, drop in car sales led to excess inventory at dealerships, forcing assembly plants and factories to cut back production.

As commented by a worker at an automotive plant in Sichuan Province, it was the first time that he could take 20 days off from work between the months of July and August. As told by the worker, the factory is a joint venture between Volkswagen, the German automaker and the Chinese FAW Group. The FAW Group in China has also been cancelling staff bonuses and reducing shift hours at the major plant, which is l0ocated near Changchun in northeastern China.

Earlier in October, both the Caixin/ Markit and the official China purchasing managers index (PMI) dropped below the threshold of 50, which means the manufacturing sector is deep-set for month-over-month contraction.