“Opportunities multiply as they are seized,” Chinese general Sun Tzu said about 2,500 years ago. Sun was speaking of warfare, but his words apply equally to his homeland’s present-day automotive sector. Auto sales in China, now the world’s largest vehicle market, have more than tripled since 2006, fueling the hope that foreign automakers like Ford (NYSE:F), General Motors (NYSE:GM), Chrysler, Daimler AG and BMW could reap big rewards from a huge new pool of buyers.
As the most promising emerging market in the world, China is a growth opportunity for U.S. and European automakers: Last year alone, auto sales in China grew by a whopping 32% to 18.06 million. But the question now is whether that level of eye-popping growth is sustainable — a real challenge as car companies make strategic investments to bounce back from the Great Recession.
Storm clouds already are gathering on the horizon. Auto sales in China have been softer than expected in recent months, rising a mere 4% in August, according to the China Association of Automobile Manufacturers. Growth projections for the year have slipped into the 3% to 5% range. At that rate, China’s vehicle sales could slip below the 20 million mark this year.
And while single-digit growth is still growth, it’s not the big payday automakers were counting on. Although they are focused strategically on other emerging markets like Brazil and India, the China opportunity has loomed large. In so big a play, any significant gap between expectations and reality can have a big impact on earnings — and stock prices.
Here are four reasons China’s much-heralded auto boom might not boost U.S. and European automakers’ fortunes as much as expected:
New Anti-Car Regulations
The Chinese government has hiked taxes and adopted new anti-car policies (for example, cutting the number of vehicle licenses issued this year by 68% to reduce traffic congestion). Although the central government this month is offering a $470 incentive to buyers, that applies only to very small, very fuel-efficient vehicles. With the Chinese government likely to continue its schizophrenia about whether to promote or protest an expansion of vehicle ownership, automakers must be realistic about the prospects for a near-term (one- to three-year) payoff.