Is the Chinese Automotive Market Set for a Bust?

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Global Trade, Supply & Demand

China may be the land of opportunity for auto makers but it is not without its challenges and the road ahead is no less daunting. Sales of passenger vehicles in China (including passenger cars, SUVs and minivans) are expected to increase from 8.7 million units in 2009 to 13.55 million units in 2015 – an increase of more than 55%, according to a special report titled China Automotive 2015: The Cost of Opportunity, released by J.D. Power and Associates this month. With growth like that, car manufacturers both foreign and domestic have been throwing themselves into the fray, adding capacity and models in a frantic drive to maintain a share of the growing market. Making a profit will for many be just the beginning of a number of challenges ahead.

By 2015 there will be more than 90 automotive brands competing in China, more than twice the number in the US. Those 90 brands will be pushing some 300 different models. Consolidation although favored by Beijing is jealously restrained by provincial governments keen to retain employment and taxes close to home, so competition is likely to be particularly tough for medium to smaller producers.

According to JD Power, among the 13.55 million passenger vehicles that are projected to be sold in China in 2015, approximately 57% will be sold in the lower-margin subcompact and compact car segments. And within these segments no fewer than 125 vehicle models will be available compared to the US where just 22% will be lower margin subcompact and compact cars. Competition within China will be intense and margins will be especially under pressure at this end of the market. Total factory production capacity for passenger vehicles in China is expected to reach 19.6 million units by 2015, although the rate of capacity utilization is projected to be only 66%. Automakers typically need to achieve at least 80% capacity utilization to cover the high fixed costs. If they can’t achieve that servicing the domestic market they may look for exports.

China Car Times ran a recent article saying they believed the Chinese market is on track for a major bubble by 2015 which when it bursts will be worse than the implosion of US car makers in 2009. Car producers are running on razor thin margins, the majority of the market is low margin small cars and the profitable end of the market, larger luxury cars, are dominated by foreign suppliers and their largely state owned Chinese JV partners.

Will we see Chinese cars for sale in the US? Yes for sure, probably by 2015. In the meantime, they have their hands full and will focus very much on the domestic market (although some like Chery are already exporting 100,000 cars a year). As incentive packages are removed and the wall of money that has gone into automotive investment over the last year or so gets translated into car production capacity and Chinese companies absorb and digest the rapid technology transfer that is going on, yes they will have to export.  Eventually we will see viable Chinese cars begin to arrive at US ports some of them may even have GM or Ford badges.

–Stuart Burns

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