Chinese Car Production – Sustainable Growth or Frothy Bubble?

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It’s true to say most observers were impressed by the short term boost the US Cash for Clunkers program gave to the US auto industry. Although that program has now come to an end, the depletion of showroom stocks has spurred automakers to pull in extra shifts to meet the demand for replacements. China launched a similar automotive focused program in the spring with incentives to buy small fuel efficient cars. Without a legacy of older gas guzzlers to clear off the streets, China’s program does not require the trade in of an old model but offers tax incentives on cars with small engines and subsidies for mini trucks. The Global Times, a Chinese publication, says this has been to the detriment of all car manufacturers but particularly the foreign joint ventures who tend to concentrate on the larger cars where the Chinese manufacturers dominate the small car market. Through July, sales of vehicles eligible for state support soared 49%, but many of these cars earn manufacturers as little as $100 each according to researcher J.D. Power & Associates (MHP). Sales of bigger, more profitable vehicles were hardly changed, so earnings for automakers are up less than 5%, J.D. Power says in the article.

Supporting this statement, Ford announced in the China Car Times that it was the only American JV to meet sales targets with sales of 119,338 in the Chinese market in the third quarter. Sales of Ford branded cars being up 107% while those of its co-branded subsidiaries and light commercial vans also at a record.  Ford’s small Focus achieved an all time best. Compare that to Toyota Motor whose sales are up just 5% this year, despite the introduction of two new SUVs. That’s a big change from last year, when Toyota’s mainland sales jumped by 18.5%, to 570,000 vehicles. Reuters reported China’s passenger cars sales in September rose 83.6% from a year earlier, quoting the China Association of Automobile Manufacturers selling a total of 1.02 million passenger cars in September, compared with 552,800 units in the same month last year and 858,300 units sold in August. Surging sales do not equate to surging profits when the cars being sold are small low margin vehicles. Even so, Chen Bin, Chief Director of the Industry Coordination Department at the National Development and Reform Commission felt the need to warn automakers to keep their cool and not ramp up production capacity saying the demand is a result of temporary Beijing incentives and would not be there in the long-term. Whether producers listen of course is another matter. With such a fragmented industry, many domestic car makers are fighting for market share more than profitability.

–Stuart Burns

Comment (1)

  1. Anonymous says:

    there are 0.7billion people live in the cities, these cities inlcude the Tier1,Tier2,Tier3,Tier4 cities.
    Of course ,due to the traffic issue, the demands in Tier1/or Tier2 are not soaring so intensively, but the demands in Tier3 and Tier4 even some rural country are dramatically booming with the small vehicle and price decrease are becoming the tide of auto market in China.
    With the restore of economy and the confidency of comsumption, the dream to have a car in most of Chinese family are expanding.
    Auto entering family time is coming . No doubt about that.
    When we talk about the grow rate of 2010 market, 5-8% YoY growth is a reasonable expection.

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