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BEIJING, China — General Motors $5-billion initiative to create cars for China and other emerging markets comes just as automakers face a collapse in the booming Chinese demand they were counting on to power their growth.
June sales in the biggest car market by number of vehicles sold shrank by 3.4% from a year earlier as an economic slowdown deepened and smog-choked cities tried to curb growth in car ownership. Sales growth has cooled from 2009's explosive peak of 45%, but the latest figures surprised analysts, who were forecasting a healthy 7 to 8% for 2015.
PROFIT SLUMP
On Wednesday (July 29 2015), Volkswagen AG said its second-quarter profit fell 16% due partly to weakness in China, where first-half sales fell 0.5%.
Those still buying cars are benefiting: GM and VW, China's top-selling brands, have cut prices by up to 53 900 yuan ($8,700). Analysts say dealers are struggling financially and automakers also might have to share more profit with them.
industry analyst Lin Huaibin of IHS Automotive said: "The days when you could sell whatever car you made are not there anymore."
This wrenching shift is especially significant because of China's outsize role in the global ambitions of US, European and Asian automakers.
EXPAND PRODUCTION
Despite the slowdown, they are pushing ahead with multibillion-dollar plans to expand production and create models to suit Chinese tastes, adding to competition in a crowded market.
On Tuesday (July 28) , GM said it will work with its main Chinese partner, Shanghai Automotive Industries Corp., to develop vehicles to be sold in China, Brazil, India and Mexico. GM said it aims for annual sales of 2-million vehicles beginning in 2019.
In April, Ford Motor Co. and a local partner announced they would spend $1.1-billion on a factory in China's northeast. Ford said that would add 200 000 vehicles to its annual China production capacity.
China passed the United States in 2009 as the biggest market by number of vehicles sold as incomes rose and Beijing promoted the industry as an engine of economic development.
Double-digit Chinese sales growth helped to buy global automakers after the 2008 financial crisis crushed demand everywhere else.
QUALITY IMPROVEMENT
Automakers added bigger backseats and other features for Chinese buyers, changing the look and feel of cars sold worldwide. Nissan Motor Co. made China a pillar of its global turnaround strategy.
Companies were preparing for slower growth, but the squeeze hit faster than many expected.
"The impact to earnings in 2015 could be substantial," said Bernstein Research in a report. "We still expect China to sell a lot more cars in future years, but returns in the market may never be the same again."
Sales in the first half rose 4.8% over a year ago, down from 11.2% growth in the same period of 2014, according to the China Association of Automobile Manufacturers.
Even that might overstate demand. Analysts say automakers have shifted to reporting shipments to dealers instead of retail sales, possibly to obscure how few cars are being purchased.
Earlier in July, South Korea's Hyundai Motor Co. said China sales fell 14% from a year earlier in the three months ending in June. That contributed to a 24% decline in profit.
EARLY WARNING
As early as March, BMW AG warned the China outlook was darkening. Europe's biggest luxury automaker said its Rolls Royce unit had sold only 14 cars to Chinese buyers in February.
The downturn is so severe that Barclays slashed its forecast for this year's sales growth to just 1.7% from 8.5%. 2016's forecast was cut to 5.2% from 8.5%.
Chinese sales still are huge. GM said a record 1.7 million GM-brand vehicles were sold in the first half of the year. But growth was just 4.4% from a year earlier — less than half the 10.7% rise for the first half of 2014.
Economic growth slowed as 7% in the first quarter — less than half of 2007's peak of 14.2% — as the Communist Party tries to steer China to more sustainable growth driven by domestic consumption instead of trade and investment.
Zhang Xin, an analyst for Guotai Jun'an Securities in Beijing said: "It is not that customers don't want to buy cars. They do want to buy. But they are smothered."
Automakers also are paying for a sales spike in 2013-14 as buyers rushed to get cars before Beijing and other cities tightened controls on new vehicle registration.
"This year, you will see some 'payback effect'," said Lin of IHS Automotive.
Foreign brands also face pressure from lower-priced Chinese rivals including Geely, Chery and SUV brand Great Wall, which are improving quality.
Earlier, Volkswagen blamed anemic first-quarter sales growth of just 2% on its lack of a low-priced SUV, a segment dominated by Chinese brands in which demand surged.
In May, GM's joint venture with SAIC cut prices of 40 models by up to 53 900 yuan ($8,700). In June, VW announced cuts of up to 12000 yuan ($2000). Great Wall Motors cut prices by up to 6,000 yuan ($970) to rev up weak SUV sales.
Dealers had an unusually large backlog of 140 000 unsold vehicles by the end of May, according to LMC Automotive. It said manufacturers might cut production until those sell.
"We have little reason for optimism," said LMC analysts in a report. "We believe that the painful market adjustment currently under way is far from over."