German car makers still see growth in China

The Wall Street Journal - BMW AG, Volkswagen AG and Daimler said they remain confident about their own growth in the Chinese car market despite signs that new-car demand is slowing and price pressure is intensifying.

The relatively upbeat comments from Germany's leading auto makers comes amid mounting evidence that slowing economic growth and tougher regulations have taken the froth out of the Chinese market—an increasingly important source of sales and profit for global auto makers—even if demand for luxury cars remains robust.

SAIC Motor Co., 600104.SH 4.32% China's largest domestic auto maker by sales, warned earlier this week that the country's car industry is struggling with high inventories, sharp discounts offered by some car makers to spur sales and steps by major cities to limit the number of cars on the streets to control traffic congestion. SAIC has domestic joint ventures with Volkswagen and General Motors Co. GM 1.14%

Volvo Car Corp., the Swedish auto maker owned by China's Zhejiang Geely Holding Group Co., has decided to cut output at its factories in Sweden and Belgium from next month partly because of unexpectedly slack growth in China, according to Michael Blohm, a spokesman for the IF Metall union. Volvo declined to comment ahead of a Sept. 6 sales update.

"We believe the situation in China is tougher than the European [auto makers] have acknowledged," said Max Warburton, an analyst at Sanford C. Bernstein, in a research note this week. He added the leading foreign auto makers for now have been spared the full impact of the slowdown, with dealers sacrificing profit margins to maintain sales momentum.

"The Germans [auto makers] have recently agreed to provide more financial assistance to the dealers to help clear inventory and are about to cut Chinese sales targets," he said.

None of the three auto makers responded to an emailed question about boosting assistance to dealers. The companies said they are sticking to their official sales targets, which industry observers consider quite conservative.

A spokesman for Volkswagen, for which China now represents its single biggest market, acknowledged that pressure on prices has been growing in China in the first seven months of this year, especially for small and midsize cars.

But because of demand for its revamped lineup of models and the strength of its brands, the company has reacted only selectively to rebates offered by competitors, the spokesman said. "Our incentive and stock levels are clearly below the industry average," he said.

Strong demand for luxury cars in China compared with cutthroat competition in the mass-market segment gives an advantage to high-end brands such as Volkswagen's Audi, which is the market leader in the Chinese premium-car segment; BMW, the world's leading luxury car maker by sales; and Daimler's Mercedes-Benz.

"Demand for our vehicles is still very high," a BMW spokeswoman said in an emailed statement.

"We generally don't participate in any price war and only grant rebates when individual models are at the end of their life cycle," the spokeswoman said.

The group is sticking to a conservative forecast for its growth in China this year, saying it will do better than the overall market. In the first half of the year, China's car market expanded by 2.9% from the same period last year but the luxury segment grew 25%.

In the first seven month of the year, BMW's sales of its BMW and Mini brands in China rose nearly 30%. In the first half of the year, China's car market expanded by 2.9% from the same period last year but the luxury segment grew 25%.

China accounts for an increasingly large chunk of BMW's sales of larger models, which are the company's key profit driver. BMW derives around 16% of sales for its top-of-the range 7-series sedan from China compared with 4% globally, according to analysts at Citi.

BMW said it expects the long-wheelbase version of its best-selling 3-series model, which arrived in Chinese showrooms in mid-July, to drive sales momentum in coming months.

BMW's comments on China were echoed by luxury rivals Audi and Mercedes-Benz. A spokesman for VW's premium unit said competition in China has "increased markedly—also in the premium market" but inventories at Audi's Chinese dealers are "on an appropriate level" to meet strong demand.

A spokesman for Mercedes-Benz said the brand continues to target a new sales record in China this year. Rebates at Mercedes-Benz "don't exceed the usual market level" and pricing is expected to be stable in coming months.

Separately, Volkswagen, whose senior management accompanied German Chancellor Angela Merkel on a state visit to China this week, Friday confirmed that it is expanding its production network in China with a new transmission plant in Tianjin, about 93 miles east of Beijing. Volkswagen will invest about €230 million ($287.66 million) at the plant, due to start production at the end of 2014.