Are China’s Slowing Auto Sales a Red Flag?

China is the 800-pound gorilla of the global economy, and for the auto industry, it’s the 800-pound gorilla that’s flooring the gas pedal. Yet in January, auto-sales figures showed that China eased off compared with the same month a year ago.

According to the China Association of Automobile Manufacturers, car sales in the world’s biggest auto market fell 24% in January. Total vehicle sales, a metric that includes trucks and buses, sank 26% from the prior year.

On the surface, the numbers don’t bode well for major auto exporters such as Ford (NYSE:F), General Motors (NYSE:GM) and Volkswagen AG (PINK:VLKAY). Ford’s China sales plunged 42% in January year over year, while GM sales declined a much more modest 8%. Volkswagen sales held up best in the region, down just 4.5% in January versus the prior year.

Are lower auto sales a red flag for the industry? The answer is both yes and no.

First off, January 2012 cannot fairly be compared to January 2011 in China. That’s because this year, the Chinese Lunar New Year came early, with the week-long celebration throughout the nation beginning in mid-January rather than the usual February.

Nothing gets done in China during the New Year celebration, and there was virtually no one buying new vehicles that week. The seasonal flux can be cited as one big reason for the decline in vehicle sales during this year’s most unusual January.

Yet even when you factor in the distorted metrics due to the Chinese New Year, it’s true that China’s economy overall is slowing from the blistering pace we’ve seen in recent years. China’s economy still is growing rapidly, at about 8% annual GDP growth.

Here in the U.S., we’d love to see growth of even half that. But there has been a slowdown in China’s rate of growth, and that’s reflected in its total vehicle sales, which were up 2.5% in 2011, much slower than in previous years.

There are other factors signaling more slowing in China’s auto business. Beijing recently announced plans to bar government officials from buying foreign brands, such as the popular Volkswagen, and Toyota (NYSE:TM). The government wants its officials to buy Chinese-made brands.

But this “buy China” effort will likely have little impact on the auto market since government officials account for only about 5% of overall passenger-car demand. Moreover, the policy isn’t likely to be aggressively enforced because many Chinese government officials have a penchant for luxury brands, such as Volkswagen’s Audi.

One other potential red flag for the Chinese auto market is that very-high-end luxury buyers aren’t revving up their purchases of supercars as fast as they have in the past. According to Italian supercar maker Lamborghini, industry sales of ultra-luxury sports cars may slow since signs that China’s economy is weakening puts off some luxury buyers. BMW’s Rolls-Royce division also is forecasting slowing demand for ultra-luxury cars in China in 2012.

While the slowdown in ultra-luxury purchases in China is noteworthy, we have to keep in mind that just like China’s GDP, the metric still is growing. Lamborghini still expects to see increasing sales in China, but only by 20% this year instead of the 30% growth it enjoyed last year. In general, makers of supercars expect the segment to grow about 25% in China, to about 2,000 cars this year. In 2011, that metric doubled, which means a slowdown in the rate of growth is still robust growth.

The bottom line is that even if China sees a slowdown in the rate of growth of total vehicle sales, we’re still talking about 18.5 million vehicles sold in the country last year. For automakers, anything close to that metric is huge. Moreover, considering that the country has 1.35 billion people — and that only a small percentage of them own cars — China will continue to be a big driver of auto sales for years to come.

So are the January numbers a red flag for the auto industry? I’d say they’re more like a very faint yellow flag at most.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned here.

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