China auto industry's 10-million curse

After a drop in 2004, China’s car sales have maintained a 20% to 30% annual increase since 2005, and totaled 8.8 million in 2007, overtaking Japan and Germany to become the world’s second largest automobile market, second only to North America.

Encouraged by annual increases of 1 million sales, people have looked forward to the 10 million benchmark, realizable if sales increased by 15% in 2008. That wouldn’t be too hard, would it, as average annual sales growth 2005 to 2007 stood at about 25%. It was planned to dedicate the 10 million sales volume to the 30th anniversary of China’s reform and opening-up.

But problems have been developing behind the scenes during that high growth rate from 2003 to 2007, and plans for the great celebration may prove to be premature.

First, laws and regulations on tail pipe emissions have lagged far behind the soaring numbers of cars added daily to the traffic mix in every major city, leading to an increased fouling of already severely polluted air.  But the laws are starting to catch up, particularly with the Beijing Olympics imminent. Second, government agencies have been keen on volume but not on encouraging the buying of cars with lower consumption and emissions. Sales volumes of dirty, gas-gorging SUVs have grown steadily, but so have international oil prices. Third, the plan to accelerate mergers and reorganize the automobile industry has gone south. After five years, industry concentration has become even lower.

And this is on top of a number of other factors, such as crippling blizzards, an earthquake and high inflation that have occurred since the beginning of the year, not to mention a slump in the capital market. Consumer confidence and buying power have been eroding.  All this looks to spell and end to four years of high growth in the automobile market.

By the end of June, China’s passenger automobile sales this year had surpassed 3 million, an increase of 18% over the same period last year. Compared with the 21% year-on-year growth in this year’s first quarter, though, the growth in sales of cars, SUVs and MPV is slipping.

Yet that number 10 million still blazes in the dreams of some car companies and government departments, and to achieve it, sales targets have been raised and vehicles to sell shipped.

Now, under this pressure, car companies are suffering a heavy inventory load. A car dealer told this reporter that in May and June, his stock of cars had risen from 40 to 150. The company’s inventory capital had reached 20 million yuan, so its earnings could cover only the monthly interest payment.

But it gets worse. The sales situation in July has deteriorated, and some regional automobile markets are on the edge of collapse. It is estimated that July sales volume will have fallen at least 10% over June. The peak season for car sales usually comes after September, but there are no guarantees the market will have found its feet by then.

But getting kicked will generally wake a body up. Most carmakers are no longer, at least for the moment, dreaming of a 1 followed by seven zeros and are busy preparing for the coming winter. Many are even reducing production to relieve self-inflicted inventory pressures. After years of rapid growth and dreams of grandeur, now the industry needs some time to come back to earth.