Voracious demand saw China overtake the U.S. as the world’s biggest car market in 2009, spurring auto giants including Ford Motor Co. and Volkswagen AG to supercharge their production in the country.
By contrast, Ford now sees a potential decline in auto sales in China for the first time in 17 years. Volkswagen suffered its first sales drop in a decade during the first half of the year. Because car demand is often a timely indicator of consumer and business confidence, it can capture economic trends before official data.
With the auto sector second only to real estate as having the largest impact on suppliers, according to Banco Bilbao Vizcaya Argentaria SA, weakness in the industry threatens to worsen a downturn in manufacturing.
A purchasing manager index for China’s factories slid in July to a five-month low. “Declining car sales are definitely a warning sign for the Chinese economy,” said Paul Gao, McKinsey & Co.’s Shanghai-based head of automotive practice in Asia.
“It’s a reflection of consumer confidence.” New car sales fell in June for the first time in more than two years. Ford projects the market at as small as 23 million units this year, compared with 23.5 million vehicles sold last year.Hyundai Motor Co. has also said its deliveries have fallen.
Going Down
The China Automobile Dealers Association last week warned that nationwide sales could drop for the first time in more than 17 years, if the country’s stock-market rout continues.
The slump in equities hurts buyer sentiment, Luo Lei, deputy secretary-general of the industry trade group, said Friday. On the ground, car dealers like Tao Jinlong are feeling the slowdown and have to work harder than ever to make a sale.
“Customers are very price-sensitive,” said Tao, a sales manager at a Ford dealership in Shanghai. “They shop around more and are demanding bigger discounts, which affects our margins. We’ve also had to spend a lot more time with them to close a sale.”
The deterioration comes at a time when President Xi Jinping and Premier Li Keqiang want consumers and services to play a bigger role in driving the economy as part of a shift away from debt-fueled investment and exports.
First Thing
“The first thing to go when rough waters are ahead is car sales,” said Thomas Glendinning, London-based analyst at BMI Research, a unit of the Fitch Group that also does credit ratings.
“People start to think less about being conspicuous and they start to move toward more thought about value-for-money in their big purchases.”
To be sure, China’s auto market is still growing and this year’s sales have been affected by a rush over the past two years to buy new cars ahead of new vehicle registration caps. Other dynamics are at work too.
After years of snapping up autos in ever-greater numbers, middle class consumers are starting to shop for other big-ticket items. Traffic-choked roads are also making daily commutes more expensive and time consuming, said Julia Wang, a Hong Kong-based economist with HSBC Holdings Plc.
“The market has grown very rapidly over the past years, and to a certain extent is reaching saturation,” said Wang.
“So the speed of expansion naturally needs to come down.” By contrast, American and European sales are picking up this year. Just a decade ago, Americans bought seven times as many cars as the Chinese, according to HSBC.
Growth Target
The pattern is similar to gross domestic product growth, which recorded the worst performance since 1990 last year and is this year headed for an even smaller gain.
The Communist leadership is aiming for about 7 percent -- a target that itself may be tough to reach without further stimulus. There are some signs China’s consumer is still buoyant, such as booming movie-theater sales.
A measure of consumption, which in China includes some government spending, contributed 60 percent to gross domestic product growth in the first half, according to the National Bureau of Statistics.
That was almost double the contribution from investment. Still, weaker car sales will hurt suppliers. As carmakers trim production and cut costs, the impact will ripple across the country, according to Le Xia, chief economist for Asia at BBVA in Hong Kong.
Car sales made up 12.2 percent of total retail sales in June, Le said. Le reckons that households earlier this year suspended decisions to upgrade their cars and opted instead to play the stock market, only to see their savings evaporate.
The Shanghai Composite Index rose more than 150 percent in the year through June 12, before a plunge that wiped out almost $4 trillion of market value. The index slid 10 percent last week, snapping three weeks of advances.
“Its decline is set to weigh on China’s consumption going forward,” Le said. “In fact, consumption has been the silver lining amid China’s growth slowdown.”
bloomberg.com
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