December 11, 2012 8:22 pm

Auto industry: Carmakers compete in a crowded market

A customer speaks to a salesperson as his son plays in a BMW car outside its showroom©Reuters

Generational change

Only in China could growth of nearly 7 per cent a year be considered a collapse in the market. But when it comes to Chinese passenger car sales – which rose 6.9 per cent in the year to October – growth levels that would be welcome elsewhere are seen as disappointing.

With foreign automakers depending more and more on Asian sales to bolster long-term weakness in their home markets, anything short of stratospheric growth from China would probably qualify as bad news. In the past five years, China contributed one-third of total global growth in vehicle sales, says Bill Russo, former head of Chrysler in China and an advisor to Booz & Co, the global consultancy.

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IN China 2012

But the new slower growth model is not going away any time soon, auto market experts say.

China’s 46 per cent growth in 2009 and 32 per cent in 2010 catapulted the mainland into position as the world’s largest automobile market, several years ahead of expectations.

By last year, however, passenger car sales rose only 5.2 per cent, while the pace of car sales so far this year has quickened only slightly to 6.9 per cent. China still sold a total of 18.5m vehicles last year, compared to 12.8m light vehicles sold in the US.

Mr Russo forecasts that passenger car annual sales growth will fall from the 25 per cent average of the decade before 2010, to 5 to 8 per cent for the coming decade.

Like the Beijing government, which thinks less frenetic growth is good for the Chinese economy overall, most auto executives welcome lower growth – and stress there are still plenty of Chinese consumers eager to buy their first car.

With more than 150 cities with a population of at least 1m, and the bulk of the Chinese population living in cities outside developed coastal areas, auto market experts expect at least single digit growth for the foreseeable future. The question is not, who will be the buyers, but who will be the sellers?

Homegrown automakers have spent three decades trying (with Beijing’s help) to become true global rivals to the US, European, Japanese and even Korean carmakers that dominate the Chinese market.

However, in recent years, domestic automakers have lost, rather than gained, market share in China and now hold less than 30 per cent of the market. Previously, they dominated the hypercompetitive, slim-margin low end of the market but western automakers have even broken into that stronghold, with attractive new small models.

Japanese carmakers have recently lost market share because of anti-Japan demonstrations in several Chinese cities in September, sparked by a territorial dispute between Beijing and Tokyo which appears far from resolution.

The main beneficiaries of Japan’s decline appear to be western and Korean automakers, whose products are seen as better substitutes because of their reputation for higher quality.

“It will take a long time to establish the consumer belief that Japanese cars are once again fashionable,” says Mr Russo.

“I don’t think it’s a permanent issue,” he says, but notes that a recovery will depend on resolution of the underlying political dispute and will take years rather than months.

While foreigners carve up the market territory ceded by the Japanese, domestic automakers are still viewed as competing mainly on price, despite their recent efforts to move upmarket in a hurry.

Lin Huaibin of IHS Automotive in Shanghai says the market’s relatively poor perception of Chinese brands is no longer merited.

“A lot of people are pessimistic about Chinese OEMs [original equipment manufacturers] but the quality of Chinese OEMs is improving and the gap is shrinking with foreign brands,” he told a recent auto industry conference in Shanghai.

“But they have a poor brand image and it will take time for consumers to understand that quality improvement,” he notes.

Meanwhile, as mainland car sales growth slows and competition with foreign automakers intensifies, domestic carmakers are turning to overseas markets to take up the slack.

They have responded by cranking out exports to some of the world’s less sought-after markets – such as Iran and Iraq – with year--to-date exports up 27 per cent and China expected to sell 1m vehicles overseas this year.

But to become global players in the auto industry – as Beijing has long wanted them to be – China’s carmakers must still find a way to crack the largest car market in the world, right on their doorstep.

Auto industry executives estimate domestic carmakers will not have even half of that market in the near future. But, then again, no one would have predicted five years ago that China would so quickly top the world in auto sales. The Chinese market has confounded the best forecasters in recent years, and this time may be no different.

With additional reporting by Yan Zhang

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