China’s Bull Market Slows on Global Woes

Special Coverage

State of the Industry: Int’l

China, the largest and most-mature automotive market of the world's key emerging economies, has less in common these days with its fellow BRIC countries – Brazil, Russia and India – and more with Western nations as effects of the global financial crisis begin to take their toll.

“Demand has been falling off sharply in the last two months, and the outlook for the remainder of the year is gloomy,” independent Asia analyst Ashvin Chotai tells Ward's.

A slumping stock market, falling property prices, shrinking gross domestic product and poor outlook for exports are the main sources of downward pressure, he says.

Study finds 90% of Chinese intending to buy new car discouraged by fuel prices spiking, with 26% delaying purchase.

While overall vehicle sales in the first eight months were 14.6% ahead of year-ago, according to Ward's data, deliveries fell 4.9% in August, reportedly the first monthly drop in China's sales since January 2005.

Analysts surveyed by Ward's expect 2009 sales to climb less than 10%, marking a sharp decline for an emerging market that saw growth of 65.5% in 2003 and 21.9% in 2007.

Chotai predicts China's new-vehicle deliveries to grow just 5% to 7% in 2008. However, Tim Dunne, J.D. Power & Associates director of Asia Market Intelligence, is calling for a 9.7% increase, while cautioning that forecast could be revised downward in coming months to as low as 4% to 5%.

“This would be a significant drop for China, which has seen annual sales growth average about 25% over the last seven years,” Dunne says, noting the growing global credit crisis is impacting China's long-vaunted status as the factory floor of the world.

“One trillion of China's $3.3 trillion GDP depends on exports,” he says. “And China's main export destinations are the U.S. and Europe, where economies are likely going into recession.”

Dunne points to news reports of “thousands of factories” shutting down in China as proof of the impact.

To blunt the effect of reduced exports on the economy, the government is urging consumers to open their wallets, with the People's Bank of China dropping interest rates for the first time in six years in mid-September and again in early October.

But this tactic could backfire, Dunne says. “Culturally, Chinese are very frugal on conspicuous consumption, but very aggressive on saving and investments to make more money.”

Another factor affecting vehicle purchases is a sharp rise in the price of fuel. The central government in June, burdened by an estimated RMB273 billion ($40 billion) spent annually on subsidies, increased the price of gasoline and diesel an average 17%.

An August poll by J.D. Power and Chinese website Sina.com found 90% of those intending to buy a new car in 2008 were discouraged by fuel prices spiking, with 26% saying they would delay their vehicle purchases.

To spur sales, auto makers, including Ford Motor Co., Volkswagen AG and BMW AG, have dropped prices on select models as much as 12%.

In contrast, export-dependent Toyota Motor Corp. announced in late August plans to slash production 10% at its Guangdong plant as a result of softening demand.

The Japanese auto maker has seen its fortunes increase quickly in China, as it surpassed General Motors Corp. to become No.2 in sales just five years after it began building locally.

“(But) sales in China are not expanding as we had thought,” says Toyota spokesman Paul Nolasco, who notes the auto maker still hopes to sell 700,000 units in China this year, 40% above its 2007 sales level.

Chotai sees reasons for such optimism, predicting that despite the global economic crisis China's market next year could stay flat or decline just 5%.

“Vehicle demand in China's interior should be more resilient,” he says. “The demand base is still low, and these parts of China are less vulnerable to the export sector.

“The other factor that will stimulate demand is price cuts. With all the capacity in place, all OEMs are under pressure to keep their plants running. Direct government support via vehicle purchases may also support demand.”

No one knows for sure which direction the maturing Chinese market will take in the waning months of 2008 and into 2009, as the global sales slowdown inflicts pain on the BRIC nations.

Says Chotai: “In emerging markets such as China, just as growth was very strong when the market was rising, it can be extremely precipitous on the way down.'”

– with Mack Chrysler

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