Downshifting

Chinese like to drive a bargain – literally. So, upon hearing that some auto companies might not reach their sales targets this year, many consumers are taking a wait-and-see approach, guessing that dealers will eventually lower their prices.

"Most of the car buyers in China actually don’t need a car for day-to-day things," said Lawrence Ang, executive director of Geely Automobile Holdings. "When they buy a car, the major driving forces are peer pressure and social class. So, if they want to delay a purchase, they can delay it," and wait for a better price.

Other potential car buyers are being dissuaded by growing pessimism about the state of the economy, having already taken a hit in property or stocks.

Passenger vehicle sales in China fell for a second straight month in September, down 1.4% from a year earlier, to 552,800 vehicles, according to the China Association of Automobile Manufacturers. August sales dropped 6.24% year-on-year.

"The golden time [for auto sales] has gone," said Mei Songlin, general manager of China operations at auto consultancy J.D. Power. "The average growth rate for the Chinese auto market has been over 20% since entry into the WTO in 2001, but the growth rate this year and the next few years will be below 10%."

Charles Huang, director of China equity research at BNP Paribas Securities, predicts sales growth of no more than 8% in 2009, with an increasing risk of flat or even declining sales volume. He says most automakers planned for growth of 15-20% in 2008, based on strong showings in the last quarter of 2007, while the actual numbers could be half of that.

"Most haven’t been prepared to face the sudden slowdown," Huang said.

Nevertheless, Geely Chairman Li Shufu said in September the company could still hit its target of 27% sales growth. Ang is less bullish, admitting that the market has been weak since April and that all manufacturers will struggle to meet their original targets.

Geely is one of three local car makers (BYD Auto and Chery are the other two) that J.D. Power’s Mei believes have the ability to deliver products of continuously better quality that appeal to the market.

The prospects are not so good for firms that are unable to do this.

Both Mei and Huang expect to see a round of consolidation in China’s auto sector. The major state-owned manufacturers – which have strong finances and government backing – are likely to hoover up smaller rivals that can’t keep pace.

Competition among the joint venture manufacturers that continue to dominate the market is also set to intensify.

Volkswagen saw sales from its two joint ventures hit 772,783 in the first nine months of 2008, up 13.1% year-on-year. Passenger car sales are expected to pass 1 million for the year as a whole, enabling the company to retain its top spot.

The outlook doesn’t appear to be as strong for General Motors (GM). J.D. Power projects the US firm’s sales to drop by 5.5% in 2008, allowing Toyota to consolidate its grip on second place, which it won from GM last year.

For its part, GM claims the figures don’t tell the whole story: If you include small commercial vehicles, the company still leads the way in China.

"GM has done nothing wrong," J.D. Power’s Mei said. "Toyota has built their first-class plants in China, sent their first-class people to China, and brought their most competitive products to China."

Long-term prospects

In the long-run, demand should be sufficient to accommodate all major foreign companies. Auto consultancy CSM Worldwide forecasts Greater China light vehicle output to pass 8 million units this year and hit 13.6 million by 2014.   

"This is still a market with a very low penetration rate, and the economy is still growing," Geely’s Ang said. "Probably by the middle of next year we’ll see the market start to recover."

This doesn’t mean the current troubles can be taken lightly, however. The skill with which firms manage their brands during this tricky period will influence their market share once the industry recovers and begins to mature.