Auto sales growth set to drop
By Yu Qiao (China Daily)
Updated: 2004-07-22 10:45

Growth in full-year automobile sales in China is forecast to continue to tumble following the sharp decline witnessed during the first half of this year, but a rebound is expected in 2005.

China's total vehicle demand will reach 5.3 million units this year, an increase from last year's 4.43 million, said Xu Changming, an auto researcher at the State Information Centre.

Domestically-made automobile sales increased by 24.25 per cent year-on-year to 2.55 million units during the first half of this year. But this growth rate was down from last year's 34 per cent.

Xu said that continued existence and even escalation of "negative factors" would mean that a market recovery would be unlikely in the second half of this year.

The major "negative factors" Xu cites are government controls on car loans and frequent manufacturers' price cuts, which have hugely depressed consumers' buying enthusiasm.

Passenger car demand will increase to 2.45 million units this year from last year's 2.03 million units.

Domestically-made passenger cars' sales growth eased to 31.59 per cent in the first six months of this year, compared to last year's 75 per cent.

This means that the market has shifted gear, and is now enjoying steady growth, compared to the "sensational growth" of the past two years, said Xu.

The "sensational growth" which took place in 2002 and 2003 was mainly a result of consumers finally having the purchasing power to buy a car.

But China Association of Automobile Manufacturers Spokeswoman Zhu Yiping said that these latest market developments mean there is "no reason to be optimistic about the market during the second half of this year."

Sales of domestically-made vehicles will reach to 1.27 million units, including 57,00 passenger cars, in the third quarter of this year.

But better times are expected for China's automobile industry when it drives into 2005, "as many consumers who decided against buying cars this year will spend money next year," Xu said.

Zhang Xin, an analyst with Guotai & Jun'an Securities Co, told China Daily that there were plenty of reasons to remain optimistic about the auto market's future prospects as "the government's macro economic controls on the industry are temporary and consumers' purchasing power remains huge in China."

Zhang said that the "skyrocketing increases" witnessed in the nation's vehicle market over the past two years were not sustainable, "but it is foreseeable and healthy that the market will rise at a rate of two to three times that of GDP growth over a long period of time."

The auto industry is one of the biggest growth engines of China's gross domestic product (GDP) which grew by 9.7 per cent in the first half of this year and plays a key role in increasing domestic consumption.

The industry reported sales of 446.67 billion yuan (US$53.95 billion) and profits of 36.19 billion yuan (US$4.37 billion) during the first five months of this year, year-on-year increases of 27.92 per cent and 11.71 per cent, according to the auto association's statistics.

Consumers would be unlikely to buy cars in the second half of this year, as they expect that tariff cuts and the removal of quotas next year will cause a further drop in prices, said Su Hui, general manager of the Beijing Asian Games Village Automobile Exchange.

Under China's commitments to the World Trade Organization (WTO), the nation will cancel the import quota and slash its tariffs to 30 per cent at the beginning of next year from the current level of 34.3-37.6 per cent.

But Su said that consumers were mistaken, as "the quota removal and tariff cuts will not result in sharp price cuts on the domestic car market."

In June, car sales at Su's auto exchange, the largest of its kind in Beijing, dropped to a low of 3,237 units during the first half of this year.

Moreover, facing an increasing number of automobile loan defaults, China's major commercial banks are revising their lending policies for the potentially lucrative market, which also dealt a heavy blow to the sector.

Many are raising down-payment requirements and shortening loan terms, and some bank branches have reportedly even told their loan clerks to suspend granting certain high risk consumer loans for automobiles.

"There is no indication that the government will relax controls on car loans during the second half of this year," Su said.

Cars bought using bank loans account for less than 10 per cent of total car sales during the first half of this year, down from more than 30 per cent a year earlier.

Foreign and Chinese carmakers also appear to be not to be very confident about market growth this year, but most of them are still heavily investing in and building new capacity in China in order to embrace future growth.

Volkswagen China Group forecast that China's car market would increase by only 10 to 15 per cent this year.

The German carmaker's sales in China declined by 4 per cent year-on-year to 310,000 cars from January to June this year.

Privately-owned Chinese carmaker Geely has lowered its full-year sales target to 120,000 units from 165,000 units "because of dormant market conditions," said Xu Gang, the company's chief executive officer.

Many of China's major car producers have cut the prices of their products by as much as 10 per cent over the past six months, in order to get a bigger slice of the market. The joint ventures of General Motors, Volkswagen, Nissan, PSA Peugeot Citroen and Hyundai are among the firms to have adopted this strategy.

"But manufacturers had better maintain price stability and curtail production levels during the remainder of the year in order to regain consumer confidence," Xu Changming said.

Chinese manufacturers' inventories had more than 120,000 vehicles by the end of June, the vast majority of which were passenger cars, according to the association's statistics.

"The more often carmakers cut prices, the longer consumers will wait," Xu Changming said.

Mounting competition has meant that overall price levels in China have moved much closer to those in developed markets following price cuts in recent years.

The average price of cars produced in China declined by 14.4 per cent over the past three years, he said.

There are some domestically-made foreign models whose prices have been lower than on the international market, such as Volkswagen's Polo and Gol, and the Ford Mondeo.

"Prices in China's car market will continue to fall because of fiercer competition with introduction of more new models next year," Xu Changming said.

Prices are expected to stabilize starting from 2006, when China's tariffs on auto imports will decrease to 25 per cent under its WTO obligations, he said.

However, despite the gloomy prospects this year, automakers still attach much importance to the Chinese market and pledged further investment here.

Volkswagen plans to inject 5.3 billion euros (US$6.5 billion) and increase its annual output to 1.6 million cars in China from 2004 to 2008.

The company said that it remained confident about China's auto market.

General Motors, second to Volkswagen in China in terms of its unit sales, will add an investment of US$3 billion and more than double its annual production capacity to 1.3 million vehicles in China within the next three years.

Geely, which is making low-cost cars, plans to lift its annual production capacity to 600,000 units by 2007, up from the current 200,000 units.

Japan's Honda Motors will set up a wholly-owned engineering company next month in South China's Guangdong Province with a registered capital of US$8.18 million to aid its car manufacturing ventures to improve efficiency and cut costs.

Honda's car venture in Guangdong has raise its annual production capacity to 240,000 units up from 120,000 units last year.

The other Honda car venture in Central China's Hubei Province also plans to lift annual capacity to 120,000 units in coming years from the current level of 30,000 units.

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