China carmakers at the crossroads

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After a decade of astonishing growth, the Chinese automobile industry may be about to take a breather.

According to industry estimates released earlier this week, year-on-year passenger car sales rose 14 per cent in the six months to June.

By the standards of a beleaguered US auto industry, that may sound like a spectacular increase – but by Chinese standards, it is enough to fuel talk of a slowdown.

Auto analysts in Shanghai say that stunningly rapid growth in the domestic car market – 34 per cent in 2006 and 24 per cent in 2007 – could not have been expected to continue forever.

Some continue to predict 20 per cent or higher growth for 2008 but several are forecasting only 15 per cent growth.

General Motors, the largest foreign car company in China, said this week that China sales had risen nearly 13 per cent in the first half of this year, a bright spot for the US automaker but significantly lower than its 19 per cent growth in the first half of last year.

Until official June and July industry figures have been released, no one is quite sure whether the past three months – which have showed slower growth – could mark a turning point for the industry or only a brief pause.

Yale Zhang, director of China vehicle forecasts for CSM, the auto consultancy, says a combination of negative factors has affected the car market so far this year.

The Shanghai stock market has fallen by half since its peak last year, reducing car buyers’ disposable income.

Meanwhile, tight government credit controls have meant fewer purchases of high-end business vehicles. Consumer confidence has been hit by high inflation and last month’s petrol price increase.

Top 10 light vehicle brands - By sales 2007
RankBrandsUnits (’000)
1Volkswagen799
2Wuling520
3Toyota472
4Chana424
5Honda423
6Chery379
7Foton336
8 Buick333
9Nissan310
10Hyundai263

Even the Sichuan earthquake in May did its part, says Mr Zhang, as Chinese consumers focused on the disaster and eschewed the luxury of buying a new car.

John Bonnell, director of Asia-Pacific forecasting for auto consultancy JD Power, says there is a chance that China could be on the brink of a significant “pause” in demand growth.

He added: “It’s impossible to predict the impact of the global slowdown on China or on the auto industry. China has withstood lots of downturns before and not been affected.”

Michael Dunne, managing director of China operations for JD Power, says Chinese passenger vehicle sales are still expected to rise by nearly 1m units this year (from 5.4m to 6.3m).

“China is still red-hot, sizzling hot,” he says. But, he adds ruefully, “so were banking profits in the US a few years ago”.

China’s fuel price rise is expected to have only a small impact on sales: for the average consumer, it will add only Rmb100 ($15) to monthly operating expenses – a pittance compared with the Rmb150,000 cost of a mid-sized vehicle.

The expectation of petrol rises, spurred on by world oil prices, could cause some buyers of sub-compacts to defer purchases and could cause all consumers to look for more fuel-efficient cars.

But buyers will not downsize, says Mr Zhang, because, in China, “size is status”.

Longer term demand is hard to predict, says Mr Dunne. “Right now, the rage is to buy a car.”

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