4 Reasons the China Auto Boom May Be Running Out of Gas

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“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.

Slower Economy + Tighter Credit = Cheaper Cars

The good news: Chinese buyers apparently love Buicks — a fact that helped GM boost sales in China by 13.4%. The bad news: Other manufacturers took a hit. Ford, which has a smaller China presence than GM, saw its sales slip by 7%. Luxury brands felt the most pricing pain, however, with J.D. Power reporting high-end vehicle demand fell from 48% in the first eight months of 2010 to 29% for the same period this year. Dealers also are now carrying high inventories. To cope, BMW and Mercedes dealerships are cutting prices of some models by nearly 20%.

The Coming EV War

By 2015, China will be the leader in electrical vehicle sales, according to Pike Research. About 55 vendors are developing electrified vehicles or launching EV development programs and are on track to create a new category of clean transport vehicles. China also will become one of the largest global consumers of EVs. The country is even offering foreign manufacturers huge incentives to build these green vehicles. But there’s a catch: To get the incentives, they must surrender the intellectual property rights for the technology to a Chinese automaker. Despite its huge presence in China, that was a non-starter for GM, which so far has not ponied up the blueprints for the Chevy Volt.

Waking The ‘Sleeping Dragon’

“Let her sleep,” Napoleon Bonaparte famously said of China. “For when she wakes, she will shake the world.“ That sentiment is particularly true in the automotive market. Chinese vehicle exports surged 57% in the first half of this year and could total 800,000 vehicles by the end of this 2011. By boosting manufacturing capacity and focusing on low- to mid-priced models, Chinese automakers collectively could build 40 million vehicles a year, a state-planning agency said. That kind of volume is bound to send a temblor through Western car makers’ growth strategies — even with the lucrative partnerships they have in place.

Bottom Line

Everyone is chasing the China opportunity because they have to — it’s where future market demand is going to be. So far, U.S. automakers like GM and Ford are more than holding their own. General Motors’ Shanghai GM joint venture alone rose 22%, while Ford Motor China’s sales for the first eight months of 2011 rose 11%. Still, challenges remain in the area of timing and expectations. Like warfare, the art of global competition in the automotive sector is “a road either to safety or to ruin.” The winners in this race will be the companies that see the opportunity as it is and make the right bets for the long term.

As of this writing, Susan J. Aluise did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/4-reasons-the-china-auto-boom-may-be-running-out-of-gas/.

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