Detroit, get worried. Car production keeps outpacing sales by a long way, driving up China's inventories faster than automakers can bring down prices. And the roads in major cities are becoming so clogged that Shanghai, for instance, has imposed a license lottery system to rein in growth in vehicular traffic.
Massive exports could ultimately prove the only way out of the glut. America, warned a US trade official recently, could see an onslaught of China-made Fords and Buicks as early as 2010, just over five years from now.
For now, the widening discrepancy between supply and demand is China's problem to worry about. Year-on-year automobile sales growth decreased to 1.1% in July for a fifth month in a row, according to the National Passenger Car Market Information Association. During the first seven months of 2004, vehicle sales growth was 24.4%. It was 70% in the same period a year earlier.
Now analysts say the growth slowdown is caused by recent price cuts of all things; buyers are waiting for prices to drop even further, or so the theory goes. Passenger car sales in July totaled 163,252 units compared to 161,502 units during the same period in 2003.
Growth in production has slowed dramatically, too, but is still ahead of car sales. According to the industry group, production rose by 20% in June, to 216,100 cars, following a 32% rise in May, and 44% in April.
In the face of rising inventories, automakers have been making substantial price cuts. In June, Volkswagen cut its prices on some models by as much as 11.7%, beating reductions by General Motors. (It doesn't take too long for competing pricing strategies to get around where these two competitors are concerned: both have joint ventures with the same Shanghai Automobile Industry Corp, which recently announced plans for an initial public offering.)
Shanghai Volkswagen, VW's venture with SAIC, cut prices on 30 models, but saved its big 11.7% cut for its VW Golf model, which got a new sticker price of RMB 75,300 (US$9,098). To put that in perspective, "the spunky versatile hatchback," as VW of America describes it, sells for US$15,580 in the US market.
The chances of production and sales lines intersecting on the same graph look highly unlikely at this stage. But it is possible that they might track each other a little more closely in the months ahead. On the supply side, power shortages have shortened assembly schedules; VW, for one, suspended production for a week in answer to Shanghai's call to heavy power users to reduce schedules on a rotating basis.
On the sales side, auto financing got a big push when Beijing cleared the way in early August for both General Motors Acceptance Corp and Ford Credit to proceed with plans to set up their financing joint ventures. Buy now-pay later plans have proved very popular in Western markets, particularly in the US where 80% of the cars on the road are bought on installment as opposed to only 15-20% in China's nascent auto finance market. So it's a good bet aggressive lending in the showrooms will help clear some inventory.
But what happens when the world's big automakers treble their China production capacity in six years' time, as they aim to do? GM recently announced it will spend US$3 billion on expanded production facilities over the next three years; added to announcements made by other global automakers, total China commitments made so far this year add up to US$13 billion.
By 2010, Ford and GM, weighed under by legacy pension plans and other high costs at home, will have to be thinking of using China to export the same cars Detroit makes more expensively to supply their home market which is just what Al Warner, director of the Office of Automotive Affairs at the US Department of Commerce, has been thinking. He told Reuters in July that China will be shipping cars to America in volume by the end of the decade.
"I don't think you can argue with the low-end cost equation," Warner said.
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