Cars

Prices may fall as sales slacken and inventories rise

By Jenny Gu (China Daily)
Updated: 2010-08-23 16:45

Last month's sales of light vehicles increased over July 2009, but there are abundant signs that China's red-hot auto market is slowing.

Related readings:  China's auto prices may fall steadily：NDRC  Passenger vehicle sales continue to decline in May  Auto sales blossom in April  China's vehicle sales may increase 17% to 16m

July light vehicle sales came in at 1.2 million units, 11 percent lower than the previous month, but still an increase of 16 percent compared to the same time last year.

Passenger vehicle sales rose 21 percent to 847,000 units, but the big story was the subcompact car market. After growing 51 percent last year, in July it recorded negative growth for the first time this year.

Some international auto groups also began to report negative growth last month compared to 20 percent-plus increases in the first half of the year.

Demand for light commercial vehicles slowed as we anticipated with 345,000 units delivered, up 6 percent over last year. For the first time this year, the minibus segment also reported negative year-on-year growth.

Despite the expectation that the market will continue to slow, China's seasonally adjusted annualized rate accelerated in July to 15.9 million units, the highest rate since March 2010.

July and August are typically slow sales months in China, but aggressive discounts and incentives by dealers faced with rising inventories are driving down prices.

The overall economy is continuing to cool as shown in major indicators such as fixed asset investment, exports and retail sales that continue to moderate.

Compared to a marked slowdown in manufacturing, however, the service sector has remained relatively buoyant, which suggests economic growth is beginning to shift from investment to consumer spending.

If that proves true, vehicle sales could maintain momentum longer than we currently expect. We now forecast 2010 passenger vehicle sales will increase by 26 percent to 10.9 million units and commercial vehicle sales will grow by 19 percent to 5 million units.

We recently made significant upward revisions to our China sales forecast.

The Chinese government has demonstrated its ability to manage the economy successfully during and after the global financial crisis.

That not only reduced the risk of a sharp slowdown in the economy in the near term, but also increased the likelihood that the government will well manage major external shocks in the future.

In both the economy and the auto market, major growth drivers are shifting from affluent coastal areas to inland provinces and rural areas.

Income growth and affordability of vehicles in inland provinces are rising faster than we expected. As a result we now expect light vehicle sales to exceed 25 million units by 2015.

With increasing numbers of Chinese brands entering the passenger car segment to compete with foreign brands, foreign joint ventures have found new opportunities in commercial vehicles, especially light trucks.

The result is a new pattern in the Chinese vehicle market in which local and foreign brands penetrate each other's strongholds.

New opportunities

But what is the opportunity for foreign brands in the light truck market? The allure is surely the profitability of these vehicles, but we should also pay attention to the solid demand for high-end products with advanced technologies, as well as cost-effective vehicles with reliable brand image in the middle of the price range.

Nissan is tapping the high-end light truck market, where most products are sold above 100,000 yuan to large national enterprises and foreign ventures.

Zhengzhou Nissan started local production of the Nissan Cabstar at the start of this year. Priced at 139,800 yuan, it competes directly with Isuzu.

GM, eying another opportunity, chose the medium-priced light truck market, which has the fiercest competition from Chinese brands including Foton, Dongfeng and JAC.

The joint venture between FAW and GM is expected to draw on GM's experience in management, quality control and technology.

For GM, the cooperation will help introduce GMC trucks, which have high price-to-performance traits as well as an image of high reliability.

Foreign automakers are even interested in the medium and heavy truck market. Daimler Group and Foton have set up joint ventures to produce Daimler's engines for medium and heavy trucks as well as Foton products. JAC also established a joint venture with NC2 Global LLC.

Advanced technologies from foreign brands, especially in engines, are a big help to Chinese makers of commercial vehicles.

High emissions and fuel consumption due to poor technology in the past has prompted the government to impose stricter standard in order to eliminate outdated companies through competition.

The author is a senior market analyst at JD Power Consulting (Shanghai) Co Ltd.