An analysis by China Business News today shows that the auto market in China will probably shrink in 2011 due to the end of the government's stimulus policy and Chinese automakers with independent brands will be particularly affected.
According to the newspaper, a report by J.D. Power, a U.S.-based market consultancy, the growth of China's auto market will slow down to 10 percent in 2011 and afterwards, following a 30 percent surge in 2010. This prediction is more pessimistic than any other forecast so far.
The forecast is based on two factors. First, the stimulus policies for the auto consumption, such as the trade-in subsidies, will stop next year. Second, the boom in 2009 and 2010 was too strong to sustain in 2011.
The Chinese government launched an array of policies to boost auto consumption in the domestic market, including tax reduction for small engine cars and subsidies for auto buyers in rural areas and for auto trade-in. That triggered a staggering rise of 47 percent of auto sales in 2009, which meant China overtook the United States as the world's largest auto consumer. On the contrary, the auto market in the rest of world has been still struggling in the aftermath of the 2008 global financial crisis.
That momentum of upturn in China's auto market continued in 2010. The sales of 14.7 million units over the first 10 months of the year marked a 35 percent growth over the same period of last year. As November and December are normally the peak season for the auto market, J.D. Power estimates that the auto sales in 2010 will reach 18 million units, exceeding the highest record in the United States.
However, that will not be sustainable in 2011. Zhu Ming, an analyst with J.D. Power said that the Chinese government has already realized the side effect of the swelling auto consumption, such as the heavy pressure on traffic and environment, and the risk of overcapacity. He does not think the government would continue to support the same growth in 2011 as was seen in 2009 and 2010.
Shanghai General Motors, GM's joint venture with its local partner SAIC, agreed that the growth of China’s auto market would slow down in 2011. But they are much more optimistic than J.D. Power.
"The China market will generally keep growing in a fast track in the five to 10 years to follow, with some discrepancy in every year. It is less likely that the 2011 growth will be as fast as that in the previous years. A 20 percent growth for the whole year is possible, which can be a little bit higher in the first half and lower in the second half of the year," said Ding Lei, general manager of Shanghai GM.
Kevin Wale, president of GM China, also estimated that China's auto sales could be moderated to 10 percent to 15 percent in 2011 with the conclusion of the stimulus policy. That is also more optimistic than the 10 percent growth forecast by J.D. Power.
The sharp decline may have more impact on domestic automakers. Kevin Wale pointed out that local automakers with their own brands may face more challenges as they have been used to at least 30 percent growth rate and installed huge capacity in 2009 and 2010. A fiercer price war may break out and manufacturers may be put under more inventory pressure.
J.D. Power statistics show that 88 percent of capacity is used by domestic manufacturers while 100 percent by joint ventures, but that can be down by 10 percentage points in 2011.
Fortunately that slowdown is not expected to take too much toll on automakers' balance sheets.
"Chinese auto brands can still make profits even with 75 percent capacity. A sweeping loss is not likely. But definitely they will face a much more difficult time ahead than they were," said Zhu Ming with J.D. Power.
