China Car Sales Hit a Brick Wall

Can you hear that hissing sound? It’s the steam escaping from China’s superheated car market. While not welcome by car makers and no doubt the subject of numerous media reports of a crashing China car market, the reality is the government has pulled off a highly effective cooling of the domestic market without raising interest rates or taxes or pushing the country into a recession. According to the FT, BYD producer of China’s most successful small car, the F3, forecast early this year to hit sales of 800,000 cars, up from 448,000 in 2009 and 170,900 in 2008 according to a WSJ article. That would have been a phenomenal achievement but the withdrawal of government incentives to buyers and tightening of bank lending will restrict BYD’s growth to about 36% this year.

Look a little deeper though and the numbers illustrate what the market as a whole is experiencing. BYD’s growth in the first six months was a sizzling 63% to 289,014 cars or 578,028 on an annualized basis, but sales have faded fast as summer approached and as with many producers sales are expected to be flat for the rest of this year.

Chinese car makers sold 13.6 million cars in 2009 and were expected to hit 15 million this year the China Car Times recently reported but that now seems highly unlikely as most volume car makers are way behind target. A few exceptions are still going strong though, BMW in an Economic Times article expects sales volume to hit 120,000 units in 2010, up from about 90,000 units in 2009. The world’s largest premium car maker sold more than 75,000 BMW and Mini brand cars in China in the first half of 2010 but their target is a more modest (some would say realistic) 30% for 2010 as opposed to the near doubling in sales larger volume producers like BYD were predicting. Even so BMW’s 75,000 sales in the first half will be followed by only 45,000 sales in the second half if they hit their projection of 120,000 for the year, a number they are still adhering to as of going to press.

These surging first half production numbers followed by flat or falling second half numbers must be playing havoc with component suppliers. The industry has been geared for double-digit growth year over year, not contraction; investment plans will be on hold while suppliers and OEM’s try to judge what may happen in 2011. Producers knew the last 18 months were probably too good to last and it’s true to say that with car ownership at 5% outside of the major cities compared to 75% (or >100% depending on how you measure it) in the US there is plenty of long-term growth in the market.   The authorities are clearly intending that the growth will be more sustainable from now on.

–Stuart Burns

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