Chinese Auto Glut Erodes Earnings

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The 5 billion yuan plant will have an initial capacity of 100,000 vehicles a year by 2012, eventually rising to 300,000.

Daimler AG Chief Executive Dieter Zetsche has said he aims to surpass BMW in the country and then supplant Volkswagen AG's Audi as the Chinese luxury-car leader.

Mercedes 10-month sales in China surged 48 percent to 53,300 vehicles. Audi delivered 123,400 cars to Chinese customers during the same period. BMW sold 72,000 cars in China in the first 10 months of the year.

In the U.S., auto sales fell 23 percent in September after the government's "cash for clunkers" incentive plan ended Aug. 24. The program boosted August sales 1 percent from a year earlier, the first monthly increase since 2007.

Capacity Expansion

Honda hasn't made any decision about whether to add new plants in China, Hojo said. The Tokyo-based company is running at full capacity of 550,000 vehicles a year in China, he said.

"In the long term, car sales in China will grow faster than GDP growth," he said.

China, home to 1.37 billion people, may boost its economy 9 percent next year, according to the International Monetary Fund. The nation has 38 vehicles per 1,000 people, less than a third of the world average.

Ford, GM

Other carmakers are pushing ahead with expansion plans. Ford and local partner Chongqing Changan Automobile Co. began work on a third car plant in September. GM, the biggest overseas automaker in China, said in August that it will form a commercial vehicle-making venture with China FAW Group Corp. Volkswagen, ranked second, plans to invest 4 billion euros ($5.9 billion) in the country by 2011.

"If you establish something now, the worst that can happen is you have to wait a year or two" before demand catches up to capacity, said Joerg Mull, Volkswagen's chief financial officer for China.

Seoul-based Hyundai is planning to build a third Chinese factory as it aims to boost local capacity by 50 percent to 900,000 vehicles a year by 2011. Toyota Motor Corp. has said it intends to raise production capacity in China to 970,000 vehicles a year from about 803,000.

"We are not going to see overcapacity in China," said John Zeng, a Shanghai-based analyst at IHS Global Insight. "They're anticipating the growth trend."

While growth may come, the surging investment in China may outpace sales, leaving automakers slashing prices to keep assembly lines moving, said Bill Russo, a Beijing-based senior adviser at Booz & Co.

"That's the risk in China," Russo said. "Supply seems to be going up in excess of demand."

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