The Surge In China's Auto Sales May Soon Slow By Bruc 358095

The Surge In Chinas Auto Sales May Soon Slowbybruce Einhornapril 05

The Surge in China's Auto Sales May Soon Slow By Bruce Einhorn April 05, 2012 Photograph by Nelson Ching/Bloomberg A General Motors Co. Chevrolet dealership in Beijing, China As a long Chinese holiday came to an end Wednesday, drivers heading into Beijing needed more patience than usual. Even on ordinary workdays, big traffic jams are unavoidable in the Chinese capital, as more and more people switch from bikes to cars. And at the conclusion of a three-day holiday for Qing Ming, the traditional festival when Chinese go to the graves of family members, the roads into Beijing were jampacked. That’s life in the world’s largest auto market: Chinese bought almost 16.5 million autos last year, up from 7.56 million in 2009. Vehicle sales in China have jumped more than fivefold in the past decade. No wonder automakers such as General Motors ( GM ), Ford ( F ), Toyota ( TM ), and Volkswagen ( VOW ) all have great hopes for the Chinese market. GM reported on Apr. 5 that its Chinese ventures sold 258,000 vehicles in March. That’s an 11 percent increase over the same period last year. For the first quarter, sales rose 8.7 percent, to 745,000 vehicles, according to GM’s statement. Volkswagen’s Audi brand is on a roll as well, with the company announcing a 40 percent increase in China and Hong Kong sales for the first quarter of 2012. Sales in March jumped 37 percent, to a record 31,500 vehicles, VW said in a press release . Ford, which for years has been trying to catch up in China to its rivals from Europe and Detroit, announced some China news Thursday, as well. Ford revealed plans to expand further in China, with the company and its Chinese joint venture, Changan Ford Mazda Automobile, investing $600 million to increase capacity at their plant in the southwestern city of Chongqing, where Ford already has two assembly plants, an engine plant, and factories to make engines and transmissions now under construction. Even before the latest expansion, Chongqing was Ford’s biggest production facility outside Michigan, the company said, and the new investment will add capacity of 350,000 vehicles, lifting total capacity to 950,000 vehicles a year. SLIDESHOW: With Gas Lines and Rationing, a Return to the Crazy 1970s Ford also will unveil four new vehicles at the Beijing auto show in late April, including three SUVs and the midsize Ford Focus. In March, Ford sold 1 billion yuan of so-called dim sum bonds, notes sold in Hong Kong and denominated in China’s currency. The company wants to use money from the dim sum bond sale to help fund operations in the Chinese market. Automakers counting on Chinese sales, however, to rev up growth have good reason to worry that the country’s market is no longer in the fast lane. On March 20, an official from China’s state-backed auto association warned of a slowdown. Not only are auto sales unlikely to hit their 8 percent growth forecast, said Gu Xianghua, deputy secretary general of the China Association of Automobile Manufacturers; even hitting 5 percent growth might be a stretch. One troubling sign comes from Toyota. Its sales in China were up just 2.2 percent last month, the Wall Street Journal reported . Toyota can’t blame a high base effect for the lackluster performance, since its Chinese sales for all of 2011 rose only 4.4 percent. If Gu is right and China’s auto market slumps, some European automakers are particularly at risk. For instance, China is now the largest market for Bentley, the superluxury marque owned by Volkswagen. Bentley’s China regional sales grew 85 percent last year, VW reported on its website Wednesday. VIDEO: Bentley's Concept SUV Unveiled China accounted for 17 percent of BMW’s sales last year, according to a financial analysis by Bloomberg. The German company’s Chinese revenue increased 37 percent last year, from €8.4 billion in the 2010 fiscal year to €11.6 billion in 2011. China was BMW’s fastest-growing market and for the first time exceeded BMW’s U.S. sales. The only place where BMW has higher sales now is its home market, Germany. As the Chinese market slows, though, prestige-brand automakers have some reason to be optimistic. Even as overall sales slump, the luxury market is showing resiliency. According to a report in the official China Daily newspaper, the luxury market far outperformed last year. “Sales of luxury vehicles maintained a strong momentum when China’s overall automobile market slowed down sharply in 2011, with total sales of up to 950,000 units,” the newspaper reported. “The sector’s growth of 38 percent over the previous year is almost eight times the rate of the passenger vehicle sector’s 5.19 percent.” Companies have to work harder to win those sales, though. Mercedes, BMW, and Audi dealers in China are offering hefty discounts of as much as 25 percent to persuade customers to buy, Bloomberg News reported last month, and the German luxury automakers that typically enjoy profit margins of 16 percent to 18 percent will need to become accustomed to margins more in line with global standards of 10 percent to 12 percent.

Paper For Above instruction

The rapid growth of automobile sales in China over the past decade has transformed the country into the world’s largest auto market, with nearly 16.5 million vehicles sold in 2011 alone. This meteoric rise, from 7.56 million in 2009, reflects the shifting consumer preferences and economic expansion in China, moving away from bicycles towards automobiles (Einhorn, 2012). Such growth presents lucrative opportunities for global automakers like General Motors, Ford, Toyota, and Volkswagen, all of whom have invested heavily in expanding their presence and capacity within China (Einhorn, 2012). However, recent indicators suggest that the previously relentless growth may be slowing down, raising concerns about a potential market slowdown (Gu Xianghua, 2012).

Major automakers have reported significant sales figures for early 2012, with GM’s Chinese ventures selling 258,000 vehicles in March, an increase of 11% year-on-year, and a total first-quarter sale of 745,000 units, representing an 8.7% rise (Einhorn, 2012). Volkswagen’s luxury brand Audi experienced a 40% increase in sales during the first quarter, with March sales reaching a record 31,500 units (Einhorn, 2012). Similarly, Ford announced a $600 million investment to expand capacity at its Chongqing plant, aiming to increase production capacity by 350,000 vehicles annually, indicating a strategic move to capitalize on the Chinese market’s potential (Einhorn, 2012). Additionally, Ford’s plan to introduce four new models at the Beijing auto show aims to further bolster their market share (Einhorn, 2012). These investments demonstrate the high stakes automakers are placing on China’s growth prospects (Einhorn, 2012).

Despite these optimistic signals, warnings from Chinese auto industry officials highlight potential headwinds. Gu Xianghua from the China Association of Automobile Manufacturers noted that China’s auto sales growth might fall short of the targeted 8%, potentially settling around 5%, due to various economic and market factors (Einhorn, 2012). Evidence of stagnating sales trends includes Toyota’s modest 2.2% increase in sales for the previous month, with an annual growth of only 4.4% in 2011, underscoring cooling demand from consumers (Einhorn, 2012). The slowing growth rate affects not only volume but also impacts the profitability and market strategies of automakers heavily reliant on China’s expanding middle class (Einhorn, 2012).

European luxury automakers such as Bentley, BMW, Mercedes-Benz, and Audi appear somewhat insulated from this slowdown. Bentley’s Chinese sales surged by 85% in 2011, making China its largest market (Einhorn, 2012). BMW’s Chinese revenue increased by 37% last year, surpassing U.S. sales for the first time, and China now accounts for approximately 17% of BMW’s global sales (Einhorn, 2012). The luxury segment’s resilience is attributed to the affluent Chinese consumers’ increasing demand for prestige vehicles, even as overall vehicle sales decline (Einhorn, 2012). Nonetheless, even luxury brands face challenges, as dealers resort to substantial discounts—sometimes up to 25%—to maintain sales volumes, which compress profit margins from the typical 16-18% down to around 10-12%, aligning with global industry standards (Einhorn, 2012).

The emerging evidence suggests that China’s auto market, which previously experienced exponential growth, may be approaching a saturation point. This deceleration could be driven by economic factors such as slowing GDP growth, increased vehicle ownership saturation, government regulatory measures, and changing consumer behaviors. The implications are substantial; automakers might need to recalibrate their strategies, focusing more on sustaining sales through innovation, luxury offerings, and enhanced customer experiences rather than purely volume-driven growth (Einhorn, 2012). Consequently, the near-term outlook indicates a potential slowdown that could reshape the competitive landscape in China’s automotive sector, demanding agility and strategic shifts from industry players.

References

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