June 11,2009

China's World-Beating Car Market Showing Signs of Weakness

By CSC staff, Shanghai

China's auto market has lately turned over more than a million cars a month for three straight months, and ranked No.1 in the world for five straight months. In the first five months of this year, China's passenger car sales grew 54.7%, year on year. The industry is rubbing its hands and wondering whether such good fortune can last.

The answer, according to the National Passenger Car Association, is apparently not. Figures for the first week in June show a distinct decline in both car production and terminal sales volume.

Changes have already occurred in car markets in different areas. Since the beginning of June, sales of some brands on the lots of General Products of Guangdong Holdings Company in the south of China have been disappointing, some lots seeing almost no customers at all, while in May, car types sold out and some prices even increased. A similar situation holds in Wuhan in central China. In the first week of June, weekly sales fell from the last week of May by more than 100 cars to only 802. Customer numbers and trade volume are both declining in Beijing, and customers that do come to the lots are often not buying.

The situation in Shanghai is a little better. The local government has encouraged the scrapping of older cars and buying of new cars by offering subsidies, and it is forbidding high emission cars from operating in urban areas. It is calculated that at least 334,000 cars fail to meet emissions standards and need to be replaced.

But Shanghai is only a single case. National Passenger Car Association figures show nationwide car production in the first week of June down 19%, year on year, and 13% down over the first week of April. In terminal markets, retail volume in the first week of June was off 25% from the first week of May, and seems to be falling from there.

Some analysts point to an increase in oil prices as a main reason for the weakness in June's auto market. On May 31, the National Development and Reform Commission lifted petroleum and diesel prices each by 400 yuan per ton from June 1.

However, other insiders blame the ending of the central government's favorable auto industry policies. Sales volumes began to decline in August last year. The central government launched supporting policies, including financial subsidies, to encourage consumers to buy. As a result, the auto industry rebounded since the beginning of this year and steadily hit new highs. But the market enthusiasm does not seem to have been sustainable, as shown by June's decline.

Sales had in fact already begun to decline for some car companies in May, with total production and sales down 4.56% and 3.11%, respectively. About 40% of car sales growth in the year's first five months came from small sized cars under 1.6 liters, as the volume of medium and high end cars stagnated. Sales of cars between 1.8 liters and 2.0 liters dropped by 10% in the same period. At one point not long ago, sales of medium and high end cars accounted for over 70% of the total. According to some dealers, even sales of economy cars fell in May, triggering the decline of the market as a whole.

To again stimulate car sales, the central government is re-launching policies to encourage replacement of old cars. Analysts hope that, although the decline on the auto market is unavoidable, the new policies will prevent it from diving too deep.


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