FOCUS: China Auto Market No Longer The Industry's Savior
[2008-12-23 17:04:27]
Foreign giants like General Motors (GM) and Ford Motor Co. (F) have increasingly been looking to emerging markets like China and India to provide a much needed fillip to declining sales at home. With rapid industrialization and wealth creation, the Chinese, in particular, were happy to oblige, with sales volume growth of nearly 22% last year and 25% in 2006.
Up until mid-year, Chinese auto sales had grown at 14%-24% every month on- year, seemingly impervious to freak snowstorms in February, a massive earthquake in May, and sliding domestic stock markets.
The terrain changed in July, when growth abruptly fell to 3.88% from a year earlier due to higher emission standards for commercial vehicles, slowing infrastructure investment and property construction, the Beijing Olympic games, and higher fuel prices.
Analysts are now warning growth in 2008 will be in the single digits, and their outlook for next year is the same, or lower.
"We expect demand to be flat for the balance of 2008, but deteriorating conditions may prove this forecast too optimistic," said John Bonnell , JD Power director of Asia Pacific forecasting.
"Consumer confidence is shot."
The market research firm expects sales growth of passenger vehicles this year to be 6.7% over 2007, less than half their forecast of 14.5% at the start of the year.
Their outlook for 2009 is even bleaker.
Bonnell said he expects next year's sales to be flat, or even decline depending on how the global financial crisis plays out.
Analysts attribute weak demand for autos to declining consumer confidence in China . Consumers' wealth has been eroded as the Chinese stock market plummeted over the past year, with property prices also falling.
China's third-quarter economic growth was lower than expected at 9.0%, slowing from 10.1% in the second quarter, and down from 11.5% in the third quarter last year.
In the last two months, gloomy headlines from the global financial crisis also dented consumer confidence.
"Consumption overall has slowed since March," said Standard Chartered economist Stephen Green . "A lot of people are waiting on the sidelines."
Real income growth has slowed because of inflation and tumbling property and stock markets, he said. Green forecasts GDP growth next year of less than 8%.
Prices To Fall, Consolidation Likely
The slowdown comes at a critical time for battered global automakers. While few expected growth in China to maintain its frenetic pace, fewer still anticipated the drastic slowdown now on the cards.
In 2007, automakers sold 8.79 million units in China , making it the second largest auto market in the world, after the U.S. Volkswagen AG (VLKAY) sold the most passenger cars, shifting 910,491 units.
In September, GM, which makes about 11% of its total sales in China , scaled down its growth forecast there to 11%-12% from 12%-15% at the start of the year. The automaker has since admitted it is impossible to forecast reliably.
Ford, which sells about 4% of its cars in China , refuses to give a sales forecast, while Toyota Motor Co. (TM) said it was not ready to discuss next year's expected performance.
Volkswagen, which sells around 15% of its vehicles in China , has said only: " The global financial market is very unstable." This is "challenging automakers in China as well as in the world."
Although Honda Motor Co. (HMC), which sells about 5% of its output in China , recently raised its 2008 sales target there by 10,000 units to 502,000, it has said the outlook for 2009 is "unclear."
Automakers may now be forced to cut prices to boost sales, and consolidation may be in store as weaker domestic players are bought up or eliminated, analysts say.
Daiwa analysts Ricon Xia has tipped carmakers to cut prices by an average 5% in the fourth quarter to boost sales. He has cut his overall industry sales forecast this year to 9% from 15%, and to 6% next year from 10%.
Lean times will also likely encourage consolidation in China's highly fragmented auto industry, although local governments' vested interests mean the process will probably be slow, Xia said.
"It's not just profit. For a local government, they also need to consider employment and related industries," he said. "It's not a simple issue. They will fight until the last bullet."
Even before the current downturn, consolidation was recognized as crucial. In December, Shanghai Automotive Industry Corp., one of China's largest state-owned auto manufacturers, reached a deal to buy Yuejin Motor Group, which owns Nanjing Automobile (Group) Corp., for around $286 million to increase its competitiveness with foreign automakers.
Regardless of the pace of consolidation, there is a growing awareness that the boom times are over. The China Association of Automobile Manufacturers, a semi- official industry association, had predicted auto sales would hit the 10 million mark this year, or an increase of almost 14%.
CAAM has not formally revised this forecast, but the director of CAAM's information department, Zhu Yiping, has since said actual sales will be "on the scale" of 10 million.
"The situation now did not exist at the start of the year," Zhu said.
