No Beijing bailout for Chinese automakers

With China's economy cooling, sales growth is way down at the country's 100-plus carmakers. But the government shows no sign of intervening.
 
As China's economy boomed during the past few years, dozens of Chinese companies jumped into the car business, setting up factories to produce autos for the growing middle class. Thanks to those new automakers, many of them backed by local governments, today there are more than 100 Chinese auto manufacturers with a combined production capacity of over 9.6 million vehicles, according to Changjiang Securities. Problem is, Chinese purchased only 8.8 million vehicles last year, according to official figures.

Now, with the global credit crisis cooling China's economy, demand for cars is growing even weaker. Growth in auto sales is expected to be just 5% this year, compared with 22% in 2007, estimates the China Passenger Car Assn. On Nov. 11, Geely reported sales for October had dropped 7.4% from last year. Last month, SAIC Motor reported quarterly profits dropped 78%, to $38 million; the Shanghai automaker's stock price has dropped 78% this year, compared with a 62% fall in the Shanghai stock index.

With sales in the doldrums and investors shunning their stocks, some of the leading Chinese automakers are taking a page from General Motors (GM), Ford (F), and Chrysler's handbook and calling for China's government to support the auto industry. However, talk of a bailout seems to be wishful thinking. Beijing failed to include any measures to help the industry in the $586 billion stimulus package announced earlier this month. And most of the largest automakers in China, including Dongfeng Automobile, SAIC Motor, and Tianjin FAW Xiali Automobile, are still profitable.

No Life Preservers

That's why the government seems to be taking a hands-off approach. It's not providing assistance to the country's automakers, but it's not forcing a much needed consolidation, either. "It's not like in the U.S. where they are going to get a lot of help with their business," says Henry Li, head of exports at BYD Auto in Shenzhen, which has halved its 2008 export target to 10,000 vehicles in light of the crisis. "The government does not provide financial support. The only thing they can do is help organize fairs to increase domestic consumption."

With an eye on long-term sustainability, Beijing is encouraging the auto industry to develop more fuel-efficient cars. For instance, in September the government raised the consumption tax on luxury cars, which had been 20%, to 40%. Chen Jianguo, deputy head of the industrial coordination department at the National Development & Reform Commission, said earlier this month that the government was considering slashing the sales tax, which accounts for one-tenth of a car's price, on alternative-energy vehicles to boost demand. Beijing is also likely to levy a gas tax, offsetting a possible fall in gasoline prices, in a step toward allowing the market to set prices instead of the state.

So far, hybrid cars have failed to catch on in China, partially because of their high price tags (BusinessWeek.com, 2/14/08). Toyota (TM) began selling its Prius model in China two years ago for more than $35,680; Toyota had hoped to sell 3,000 units in 2006 but did not to reach that target until earlier this year. "I believe clean, energy-efficient cars have a bright future," says Etsuo Hattori, Toyota's executive chief representative for China.

Psychological Impact

Meanwhile, Toyota and other foreign automakers that had been counting on big sales in China will have to settle for less. Hyundai sold 243,000 vehicles as of the end of October, says Beijing deputy general manager Li Honglu. That means the company is likely to fall short of its target of 380,000 vehicles for the full year. "We could say that our earnings are not a pleasant surprise," says Li. Toyota has already dialed down production in Japan because of weak demand from not just the U.S. and Europe, but also China. The Japanese company originally expected to sell 700,000 vehicles in China this year, but will probably fall 100,000 short of that goal, says Hattori. "A lot of potential customers have the money to buy cars, but they have been affected psychologically from the financial crisis," he says.

Even affluent Chinese are feeling the pressure. Last summer, Nissan (NSANY) started selling its luxury Infiniti model in China and is on track to sell 4,000 of them this year, compared with 1,500 in 2007. But demand for high-end cars has dropped, says Yasuaki Hashimoto, president of Nissan (China) Investment. "I am not so optimistic about the luxury market," he says. "I think it will be affected to some extent by the crisis."

Nevertheless, with China being one of the few markets in the world that is still growing, some foreign automakers are forging ahead with their plans to invest in China. For instance, Toyota is expanding a factory in the western province of Sichuan, scheduled to open in 2010. Rival Nissan in September started construction on a new factory, also scheduled for a 2010 debut. And Chinese and foreign media reported early this month that SAIC Chairman Hu Maoyan says even GM wants to expand in China. The U.S. automaker is looking to raise its stake in a joint venture with SAIC above its current 34%, Hu said. GM has not commented on the reports.