Crisis forces carmakers to face problems in China

SHANGHAI (AFP) — Car makers in China are locked in price wars, laying off workers and slashing forecasts as the financial crisis transforms what was once one of the auto industry's few global bright spots.

PSA Peugeot Citroen announced recently it was laying off 1,000 workers at its factory in the central city of Wuhan.

Other automakers are also scaling back while Renault has postponed indefinitely its plans to enter the Chinese market.

"We will see much, much slower growth in China," Ivan Hodac, secretary general of the European Automobile Manufacturers' Association said on the sidelines of a recent automotive forum in Shanghai.

"Companies' looking to China to offset the problems they have encountered elsewhere is also being put in question."

In an economic slowdown, automakers are typically the second sector to be hit after the construction industry because, next to housing, cars are consumers' most expensive purchases, Hodac said.

The financial crisis struck as carmakers' inventories of unsold vehicles in China were at their highest levels in four years.

Sales recovered slightly in October after two months of decline, rising 8.4 percent on-year after Toyota, Volkswagen and Ford Mazda's Chinese joint ventures and others offered deep discounts on new models.

Vehicle sales rose 11.1 percent in the first 10 months of the year with 5.6 million units sold, but that pales next to the 25.2 percent on-year growth for the same period seen a year earlier, according to Chinese industry figures.

China's auto sales growth is expected to slow to 3.8 percent next year and 6.4 percent in 2010, according to a forecast by Hou Yankun, an analyst at Nomura.

In addition to discounts on new models, dealers are selling older ones at a loss, according to auto industry sourcing portal Gasgoo.com, which is 60 percent controlled by Chery Automobile, China's largest independent car maker.

It estimates forty percent of China's car dealers are losing money and nearly a third could close in the coming months.

China's car industry as a whole recently cut its 2008 sales target by 20 percent to eight million, said Thomas Callarman, an operations management professor at the China Europe International Business School.

This has come after years of ramping up production in anticipation of huge demand.

"Two years ago at this same auto forum, some of the same manufacturers were complaining they were already having over-capacity and they were building more capacity," Callarman said.

The current turmoil is a reality-check for car companies who now must look beyond optimistic forecasts and at how they are performing against the market as a whole, said Klaus Paur, head of automotive research at TNS China.

"This financial crisis is an amplifying factor for identifying the low-performing car manufacturers," Paur said.

However, there are still reasons to be optimistic about China, which is expected to overtake the United States as the world's largest car market within seven years, Paur said.

Growth potential remains with only 20 people for every 1,000 owning a car in China, compared with 500 per 1,000 in Europe and more than 700 per 1,000 in the United States, he said.

"The pace of growth slowing down now is to some extent beneficial to the industry because we'll be taking out a lot of the inefficient capacity," said Raymond Tsang, a partner at the consulting firm Oliver Wyman.

He expects a new wave of consolidation over the next 12 to 24 months in the fragmented sector, which has more than 100 auto makers, many propped up by regional governments, he said.

"We'll be taking out a lot of the inefficient players or taking out a lot of products," he said.

But companies should also be careful about drastically cutting back on investment and their research and development in China, he warned.

"They really need to think about their longer-term growth prospects in this market and try not to overreact to the current economic situation," Tsang said.