Sunday, May 22, 2011

Can China get back in fast lane for cars?



TWO YEARS AGO, a new world order for passenger cars was being ushered in. In the aftermath of the global financial crisis, the US, the long-reigning king of cars, saw year-on-year sales plunge from a high of over 15 million cars to just over 10 million, while China with its 120% annual increase in sales edged past it to take the top spot. Pundits were rushing to write epitaphs for Detroit, the world’s automotive capital and were hailing China as the next auto powerhouse.
What a difference two years makes. China’s passenger-car market grew merely 2.8% yearon- year in April. Indeed, car sales last month were down 15.2% from a month earlier. To put that in perspective, car sales in the country grew just 7.6% in the first four months of 2011, compared with about 120% of annualised growth seen two years ago.
 
In contrast, US car sales were up 18% yearon- year in April. That’s not a one-month aberration; Detroit is seriously back. Year-on-year, US car sales are currently trending above the 14-million-cars-a-year mark — an almost 40% rebound. New models from reviving US car giants such as General Motors, Ford Motor and Chrysler Group as well as foreign makers such as Hyundai Motor are the reason for the renewed boom in car sales, although higher petrol prices in recent months are forcing buyers to switch to smaller, more fuel-efficient models.
 
The tale of the two largest car markets in some ways reflects the gradual economic recovery in the US and slowdown in China’s runaway growth. Just as a 100% annual growth in car sales was unsustainable in China, a mere 10 million units in annual sales in a market as large as the US was a temporary phenomenon. Yet, it is the pace of the sharp decline in China’s growth and the rebound in the US that has surprised global car makers.
 
To be sure, government stimulus measures — including tax cuts, subsidies and generous rebates that expired at the end of last year — have hurt the sales of cars in China, as have restrictions like new licences by local authorities to ease traffic gridlocks in large cities including Beijing and Shanghai. If passenger cars are grinding to a screeching halt, the broader auto market in China that includes trucks, buses, pickups and other commercial vehicles is actually in reverse gear — shipments of commercial vehicles in China were down 7.84% last month.
 
Slumping auto sales are also an indication of the impact of the auto parts supply-chain disruptions in the aftermath of the earthquake and tsunami in northeastern Japan two months ago. For an idea of how much the parts supply chain disruption has affected sales, consider this: The market share of Japanese cars in China fell from 21.9% in March to 15.4% in April as Japanese plants in China drastically cut production. Toyota recently indicated that it might take up to another three months before the auto parts supply-chain is “normalised”.

China isn’t the only fast-growing auto market that has been dramatically affected by the supply- chain disruptions, rising interest rates and higher fuel prices. The slump in the new high-growth markets has up-ended the global car market. Emerging markets now make up over 50% of total global passenger car sales. Take India, where passenger car sales grew 13.2% in April — down from a 24% annualised growth just a year ago.
 
Like in China, the burgeoning middle class with higher disposable incomes has been driving growth in car sales in India. Passenger sales in India grew 30% in the year to March to 1.98 million units.
 
Analysts have since pared annual growth expectations for passenger car sales in the country to just below 15% this year. One of the reasons is the higher rates financial institutions are charging for car loans. These rates have risen from about 10% 18 months ago to about 14.5% currently. The Reserve Bank of India has hiked interest rates at least nine times over the past 15 months to tame inflation and clearly isn’t done hiking yet.
 
Other emerging car markets aren’t faring any better. Indonesian car sales fell 7% yearon- year in April, according to Gaikindo, the Indonesian automotive association. And Brazil’s total auto sales (cars and commercial vehicles) are likely to grow 15% this year from 3.5 million last year, after rising 86% over the previous four years. Of the fast-growing markets, only Russia remains piping hot. Its passenger car sales grew 42% year-on-year in April, down from 77% growth in March and over 100% year-on-year growth late last year.
 
Don’t write off China as a global auto powerhouse, however. Large car makers in China such as GM, Shanghai Automotive Industry Corp, Hyundai and Guangzhou Automobile Industry Group have recently announced plans to double or triple their manufacturing capacity within the next four years. If all the new plants and capacity expansion that have been announced are built, China could have a capacity to make nearly 50 million cars a year by 2016. That’s about as many cars sold all over the world — including in China and the US — as recently as two years ago. The most optimistic projection for China is by consultancy JD Powers, which forecasts total auto sales (including commercial vehicles) to soar to 29 million cars by 2015.
 
The impending glut in China’s auto manufacturing capacity is such that a mass-scale restructuring is now looming. Clearly, some of the smaller manufacturers will be bought out by the larger global or local players. Yet, China still has its work cut out for it if it wants to use some of the spare capacity to dump cheap cars on global markets. Unlike consumer electronics, where brand names were eager to outsource to contract manufacturers, the global auto makers are essentially designers, assemblers and marketers putting together parts sourced from suppliers. They are unlikely to give up the assembly, design or marketing parts of the business. South Korea’s Hyundai, which began selling cars in the US in the mid-1980s, has only recently begun to gain traction among US buyers. China’s car makers will probably do it quicker, but it will still take them a decade or more to make serious inroads.

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