Gravity visits China's car market

 SHANGHAI -- For the first time in five years, there are indications of softness in China's car market.

The slowdown, if sustained, will begin to separate winners from losers among the 46 brands competing for market share.

Sales of cars, SUVs and minivans increased by only eight percent in April, compared to first quarter growth of 18 percent.

This month, car dealers in Shanghai, Beijing and Shenzhen reported continued lackluster demand, according to results from a quarterly survey conducted by J.D. Power and Associates.

Two factors are damping consumer confidence, say the dealers.

First, the Shanghai stock market has skidded to the 3,300 level, from its peak of 6,000 in October 2007. In China, car buyers come from pools of the wealthy elite that make up less than 1 percent of the population. Their propensity to spend is somewhat linked to property and share prices.

Second, consumers believe that the government will soon release price controls on gasoline. State-owned oil companies, now subsidizing fuel prices, have been losing hundreds of million of dollars. Today, Chinese drivers pay $2.85 for a gallon of gas versus $4 in the U.S.

This month's earthquake in Sichuan Province is also expected to dent demand in the provincial capital of Chengdu, China's fourth largest city market.

It is true that April and May historically are seasonally weak months for China's auto market. But dealers report that the current lethargy in demand may last into summer.

Pressures of a slowing market are rarely distributed evenly. And China's market is no different.

Through April, Toyota's two joint ventures sales were up 44 percent in 2008. Honda achieved an increase of 37 percent. And market-leading Volkswagen, which is on track to sell more than 1 million cars in China this year, recorded a 29 percent rise. Ford was also up 29 percent, albeit from a much smaller base.

In contrast, other makes are under pressure. Nissan saw sales fall 3 percent through the first four months of the year. Peugeot/Citroen group sales were flat. And China's top automaker, Chery, achieved only a 5 percent increase.

GM, which reports that it is preparing to launch several new models, managed 8 percent growth through April.

A hike in gas prices in widely expected. When that happens, look for Chinese buyers to become more discerning.

Much like American customers, Chinese buyers will look for models that offer adequate size and better mileage. The five best-selling models in China this year are all powered by engines of less than 1.8 liters.

Smaller engines? Yes. Cheapest prices? Not necessarily.

Chinese consumers will give chase to better mileage. But this does not mean that they will also pursue small cars at the lowest prices.

Chinese brands like Geely and Chery dominate the under-$10,000 segment today. But their share of the market has slipped, while that of Japanese makes Toyota and Honda has continued to climb.