Mild Growth Expected for China's Car Sales in 2013

Local governmental policies to curb street congestion will impact car sales

In its annual car sales report for 2012 released earlier this year, the China Association of Automobile Manufacturers (CAAM) commented on market prospect for this year. It anticipates a 7% growth for car sales in China this year, reaching 20.65 million vehicles and reflecting the association's optimism for this year as compared to the 4.3% growth of last year or the slim 2.5% recorded for 2011.

Affected by the economic slowdown, car purchase restriction policies implemented by some large cities, reduced demand for Japanese cars due to the Diaoyutai dispute and other factors, the performance of China's auto market last year was disappointing, failing to reach the 5-7% growth predicted by the CAAM last July.

The CAAM has a better outlook for this year based on China's mild economic recovery and the continued expansion of foreign carmakers' investments in the country. Shi Jianhua, Deputy Secretary General of the CAAM said in an interview with the Wall Street Journal: "Enhanced strategies to fuel China's economic growth will drive auto market demand, and urbanization will provide support for long-term demand; a 7% growth in Chinese auto sales can be expected this year".

Based on the report, sports utility vehicles (SUVs) will remain the fastest-growing segment, at 26% sales growth over last year, while passenger cars (light passenger vehicles seating no more than nine people) may perform slightly better than the overall market, achieving a sales growth of 8.5% or 1.68 million units.

The CAAM said that, "China's continued stable macro-economic policies are conducive to automobile market development, and that urbanization is the core of China's economic policy this year, which will drive demand for cars.”

The CAAM comments that China's automobile market is still one with great potential, and last year foreign carmakers reaped bountiful sales, apart from Japanese firms.

Cautious Optimism
Audi, for example, reported worldwide sales of 1.455 million vehicles last year, an 11.7% growth, for which the Chinese market contributed the biggest part, accounting for almost 30% of the company's global market. The company's annual sales in China increased a very healthy 29.6% last year, reaching 406,000 vehicles. Previously, BMW also published data showing a 40% sales growth for China last year.

According to a Bloomberg report, the Ford Focus was the best-selling car in China last year, squeezing past 2011's best seller, the Buick Excelle. The vehicle with the fastest growth in the Chinese market was SUVs, with Great Wall's Haval leading last year.

According to a survey by certified public accountants KPMG, China continues to be the global carmaker's first choice for investment because "both domestic demand and export opportunities are large."

Some market observers, however, are cautious. The Beijing government's efforts to change the investment policies, for example, may discourage investment willingness, especially in construction and heavy industries, and demand for commercial vehicles may probably be affected.

Industry analysts believe that it is not only demand for commercial vehicles that may be impacted, demand for passenger cars may also be unsteady, especially if more local governments were to adopt restrictive vehicle purchasing measures this year to combat street congestion.

Exodus of Dealers
The almost stagnant market over the past two years in fact has made life extremely difficult for the so-called 4S dealers—those engaged in “Sales”, “Spare parts,” “Service”, and “Survey” (customers' feedback)—to survive due to worsening losses. Since the fourth quarter of 2012 the China Automobile Dealers Association hyas reportedly seen significant shrinkages in the number of 4S dealers in China.

Luo Lei, deputy secretary general of the association, says that on average dealers of imported vehicles suffered the worst losses of over 50% (paid-in capital down 50%) in 2012, dealers of domestic brands about 40% and joint ventures around 35%.

In China, according to mass media, with underselling competition, spread of vehicle purchase restrictions, and the crisis faced by Japanese carmakers, the automobile market has stagnated and the 'micro-growth' has been unable to sustain more than a handful of 4S car shops which proliferated along with the high-growth car market over the past few decades.

Runaway Dealers
Guangzhou Honda and Changan Mazda reportedly saw their dealers closing shop, while a dealer of Dongfeng Citroen “ran away” and another disappeared. China's mass media called phenomenon the 'collective escape' of 4S car shops.

"Previously dealers could make a decent living with eyes closed, now you not only need eyes wide open, but also must cautiously keep your heart and gall bladder from falling," sighed the boss of a car dealers group, who said that China's auto market is beginning to see a dealer 'exodus'.

In the peak years, the 4S car shops, which ran the “four-in-one” business to provide full services, with each hiring 30 to 40 people and investment per operation usually exceeding 10 million RMB. The ones who have gone under have mostly posted red ink for two consecutive years and finally couldn't afford to keep going last year, with those staying afloat reportedly downsizing staff to only one salesperson, two after-sales people, and one for finance.

Some carmakers in China are reportedly beginning to change business models, with Great Wall and Haima attempting to return to the regional general agent model, or promoting a 'mini 4S store' mode, providing maintenance and repairs only to minimize risk of big loss.