Will China's auto sector rebound?

What's happening to China's car market?

The "skyrocketing increases" in sales in the nation's vehicle market in the past two years are beginning to tumble back to Earth.

Given slipping sales, plummeting prices and falling production, there is cause for concern.

Some experts predict there will be a rebound -- sales have been in decline since January -- in the year's fourth quarter.

The situation has made many analysts perplexed. They aren't sure how to assess the situation, or how to respond to it.

Actually, authorities' efforts to cool the growth of China's car market are reasonable. For starters, their efforts are based on the central government's macro regulations.

As investments are strictly controlled and the financial policy is more prudent, capital flows will change, which will result in greater influence over the flow of money.

People's Daily recently reported 10 per cent of car sales in the year's first half involved bank loans. That was down from 40 per cent in the first half of last year.

Rising output of the automobile industry has resulted in increased pressure to sell vehicles. As a result, affected by the nation's macroeconomic policy, automakers have clashed prices.

However, if a carmaker changes prices too often, consumers will become wary. Most, if not all, consumers, will hold onto their money and wait for the next price war.

That will also contribute to the slow growth of sales.

Domestic carmakers' overly optimistic evaluation of the sector has resulted in a glut of vehicles.

As a result, many carmakers have been forced to alter their production and sales plans. Shanghai General Motors (GM), for example, recently cut production from 300,000 vehicles to 275,000; Beijing Hyundai suspended production of its Sonata 2-litre (AT) sedans in March; and Shanghai Volkswagan (VW) in May announced plans to stop production of two models of Passat, after prices fell below 200,000 yuan (US$24,000).

Nobody can say with any degree of certainty that China's car market will rebound. In fact, it is far too early to make such a judgment. There is nothing on which to base such an analysis.

Statistics indicate the growth rate of vehicle sales rose slightly in July from the previous month.

Some markets, for example, reported "having more people looking around."

Sales of Shanghai VW and First Automotive Works Corp (FAW)'s vehicles lagged behind other carmakers in early June. That reportedly was due to rumours VW and FAW planned to cut prices.

They did cut prices, and their sales have rebounded.

Although the rebound still has a long way to go, the currently cooling market is conducive to the sector's long-term healthy development.

Considering all factors in the market, the sector is under-performing. The nation's macroeconomic policy and the psychology of consumers have greatly affected the growth rate of sales.

China Association of Automobile Manufacturers' statistics indicate 2,553,600 Chinese-made vehicles were sold during the first half of this year. That was a year-on-year increase of 24.15 per cent.

Compared with the United States, which witnessed a year-on-year growth rate of 1 per cent during the first six months, and Japan, whose car market dropped 1 per cent, China's car market posted strong growth.

Given the slowing sales rate, China's auto industry has an opportunity to think about "overheated investment."

The "sensational growth" witnessed in the nation's vehicle market over the past two years resulted in the sudden centralization of investment.

Not only did the multinational corporations put forward gorgeous plans, a large number of enterprises began investing in the auto industry.

If we base our forecast on the 10-per-cent growth rate of Dongfeng Motor Co, Ltd (DFL) in the past two years, the over-exceeded production capacity in China's auto market will appear soon.

Some planned investments will have to be put on hold amid the white-hot competition and the sharp increase of venture capital.

Moreover, less competitive enterprises will be forced out of business. That will help ensure the industry's long-term adjustment and healthy development.

As for the auto enterprises, the slow growth in vehicle sales gives them an opportunity to take a break, and to focus on reinforcing their core competitiveness -- such as technology research, cost controls, quality, market strategies and network services.

Even though China's car market is price-sensitive, companies must still take steps to improve their core competitiveness, rather than merely adjusting prices.

What's more, the slow growth in sales gives consumers time to adjust their style of consumption. The temporary cooling-off period can help consumers think about the influence of vehicles on their lives. After all, a mature market has reasonable consumers.

No matter which detour the auto market chooses, we, as consumers, must objectively evaluate the situation.

At least we can say, even though the growth rate of vehicle sales is cooling, China remains the world's fastest-growing major car market. The sector continues to grow around 20 per cent.

Source: China Business Weekly