Automakers See Chinese Headwind

The recent sales numbers in China may have put to question the belief that the automobile market in the country would be the harbinger of worldwide automobile growth. In February, sales of all vehicles increased 5% and that of passenger cars rose 2.6% on a year-over-year basis, representing the slowest pace of growth in two years.

This is just not all: China’s sales in January-February ticked a growth of 10% compared with a robust 84% in the same period of 2010. Let us have a look at some of the leading automaker’s individual sales numbers in China.

General Motors Company (GM), the No.1 automaker in China, recorded a 34% rise in sales to 184,498 vehicles. However, the company’s sales reached its monthly high in January to 268,071 vehicles, reflecting a growth of 22.3%. These apart, the automaker’s market share dipped to 11.4% in the fourth quarter of 2010 from 13.1%–13.6% in the four preceding quarters.

When we look at the sales numbers of GM’s hometown rival, Ford Motor Co. (F) in China, we become further disappointed. Ford recorded a growth of 11% to 31,934 vehicles in February compared with 20% to 53,340 vehicles in January.

On the other hand, Japan’s second largest automaker, Honda Motor Co. (HMC), has the same story to narrate. Sales of Honda ebbed 6.5% to 41,348 vehicles in February in sharp contrast to more than two-fold increase in sales to 65,680 vehicles in January.

What is Wrong with China?

The China Association of Automobile Manufacturers (CAAM) has a straight and simple answer to this question. The automobile industry think-tank believes the weeklong Lunar New Year holiday accounted for the sluggish sales. But are the things all that simple or we must be worried about the market hitting the bottom?

At this point, the role of Chinese government comes to prominence. The Government of China had been playing an active role in luring buyers to purchase cars, especially smaller and fuel-efficient ones.

However, the subsidies for small car purchases have been suspended recently. Secondly, the government raised the excise tax on smaller vehicles (with engines of 1.6 liters or smaller) to 10% in January from 7.5% last year. The tax had been reduced from 10% to 5% in 2009.

Thirdly, auto loans have already become less flexible. In 2010, the government has trimmed the bank lending targets to $1.1 trillion from $1.6 trillion in 2009, thereby affecting the consumer auto loans.

Besides government intervention, China has an inherent problem. The margins in the country are lower than that in the U.S. and Europe. J.D. Power and Associates have noted that average transaction price for a new passenger car in China is $17,500 compared with $28,000 for all new light vehicles in the U.S.

Apart from these structural maladies, rising oil prices undoubtedly led to the sluggish sales. Average oil prices reached $109 per barrel last week from $82.1 per barrel last year while average gas prices touched $3.57 per gallon last week, up 75 cents from the average price in 2010.

Conclusion

Given the headwinds, we now believe China’s “much hyped” growth rates in the past appears to be unsustainable, as CAAM has asserted that there would be an overcapacity in the industry in the future given the rate of expansion of world’s leading automakers.

However, the Chinese market has definitely not reached its bottom. In fact, it has taken the winding road to the new phase of growth, which we should consider as the transition to the balanced and sustainable growth.

As a result, automotive thinktanks and automakers themselves are now predicting tamed growth rates in the industry. J.D. Power forecasted a growth of 9%–10% while CAAM expects a growth of 10%-15%.

Last month, GM CEO, Dan Akerson stated that the company is now “guardedly optimistic” given the present scenario in Asia, especially China. He said, “There are a lot of moving parts; some headwinds, some tailwinds.” The automaker predicted a growth of 10%-15% in 2011, which is much lower than its 27% growth in 2010.

Demand trends in China have already indicated strong market fundamentals. Although, sales of small cars and vans have decreased, demand for higher-end vehicles remained strong.

Car owners are continuously upgrading to sports utility vehicles (SUVs) and premium imports. Although, sales of SUVs slashed 30% in February from the previous month, it jumped 50% from the year ago level. This is surely a tailwind for automakers to look for potential growth in the world’s largest auto market.

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