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  Auto Industry
Rebound in auto sector expected in 2007
[ 2004-12-05 14:04:55]

The race by global carmakers into China has gone from pedal-to-the-metal to pile-up, and experts fear it will take longer than previously hoped for the industry to return to cruise control.

Bad news continues to roll in -- from falling sales and over-capacity to price wars and investment slashing.

Volkswagen's main China venture said sales will dip about 9 per cent this year. The firm warns sector capacity already exceeds demand by 20 per cent.

General Motors' China CEO Rick Wagoner predicts at least another six months before a turnaround, and Hyundai Motor Co warns the market could stay flat next year.

"We were expecting a slowdown, but we were not expecting the slowdown would be as big as it has been," Jean-Claude Germain, PSA Peugeot Citroen's top man in China, said.

Two months of unsold inventory -- some 300,000 cars -- sits on lots across China, as once-blazing demand growth stalls.

Further price wars and investment cuts are expected in an industry where manufacturers from General Motors Corp to Toyota Motor Corp, and parts vendors from Delphi to BYD, are jockeying for position.

With US$13 billion in planned expansion to triple annual output to 6 million sedans by 2010, firms are bracing for a shake-out.

Insiders predict the market will grow 10 per cent next year, after a tepid -- by Chinese standards -- 10-15 per cent this year, as China keeps an iron grip on car loans.

"We'll see a sweeping consolidation over the next two years. The next round of growth isn't going to happen until 2007 -- at the earliest," said Xu Hongyuan, a high-profile economist with the State Information Centre.

"Until then, you're going to see far fewer major investment announcements. People had been too optimistic, too early."

Global players have plenty riding on Chinese maintaining their new-found love affair with the car, seeking to prop up bottom lines sagging under saturated North America, Europe and Japan by expanding into a market twice the size of South Korea's.

A la Brazil

Standard & Poor's draws an analogy with Brazil, where heavy investment in the 1990s led to plants running at half capacity.

Expansion in China's sedan sector, the world's fastest-growing last year, began slowing in the second quarter, after China moved to cool overheating sectors of its economy.

Those measures squeezed margins after market leaders VW and GM slashed prices by up to 11 per cent to try to shift more cars.

Xu said the market may remain weak into 2007, when per capita GDP for the 130 million Chinese clustered along the coast could treble to US$3,000 -- a level that triggered Japan's economic take-off in the 1960s.

But, for now, discouraging signs abound.

GM's China sales slid 6.5 per cent in October from September, though, with more than 400,000 units shifted, it still sold more cars in the year's first 10 months compared with all of last year.

At one point, it looked as if China would yield a quarter of the Detroit giant's 2004 earnings. That was before third-quarter income from China plunged more than 40 per cent, to US$80 million.

Rival Ford Motor Co hopes to sell 65,000 cars from its China plant this year, but makes no promises.

"We hope to reach that target. But there could be a problem," Ma Jun, vice-president of Chang'an Auto, Ford's local partner, said with a nervous laugh. "Consumers are holding onto their money, waiting for the next round of price cuts."

Li Shufu, chairman of small car maker Geely Auto, said prices of higher-end cars, such as VW's Passat or GM's Buick Regal, had room to fall by up to one-third.

"Only then would prices be equivalent to Japan's," Li told a recent forum.

Geely has lost 40 per cent of its stock market value since April.

Running on empty

Some players warn domestic firms may try to export their way out of the jam if China fails to become the world's No 2 car market by 2010, as McKinsey forecasts.

Others appear to be scaling back. Volkswagen intends to slash investment in China by 22 per cent, to 2.1 billion euros (US$2.7 billion), over the next two years, though executives hasten to add total investment of 5.3 billion euros by 2007 still stands.

Hopes had run high that increased financing of autos would sustain growth. But a soaring bad loan rate at State-owned banks -- which dominate the business -- has put an end to that.

For now, carmakers are expected to rein in expansion, trim prices and gird for a shake-out to cull weaker players.

Shanghai Volkswagen's chief, Joerg Blecker, said his firm is focused on cutting costs, but does not have plans for further price cuts.

"If carmakers continue to rely on pushing out new models and cutting prices, it's unlikely there'll be any improvement," said Xu Xiang at Southern Securities.

"In the short term, they appear to have run out of choices."

 
 
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