When Li Chen took a job selling cars at the Kailong Pacific Buick dealership in Shanghai six months ago, work was a snap. Demand was so strong that people were willing to slap down $40,000 in advance to get quick delivery of a Buick Regal sedan, and a hotshot salesman could close a deal in 30 minutes flat. These days, however, every sale is a tough slog. "More customers are looking instead of buying," says Li.
Li isn't the only one singing the showroom blues. Dealerships from Shenzhen to Shenyang have been struggling to move cars in a market that has seen monthly sales decline steadily since hitting an all-time peak in March. Year-on-year, sales grew just 6.8% in June and 2.5% in July -- and August figures seem likely to come in even weaker. That's a dramatic reversal from last year, when auto sales surged 76%, to 2.1 million cars, on top of 62% growth in 2002. "It has been a pretty ugly picture," says Philip F. Murtaugh, chairman of General Motors (GM) China Group. Although GM has fared relatively well -- its sales were up 56% in the first half -- the summer months have fallen short of expectations. GM's inventories have been edging up, and the company in August cut production at its Shanghai plant to five days a week from six days. "We absolutely expected that growth would slow, but that it happened so quickly took people by surprise," Murtaugh says.
Why the downshift? Blame China's efforts to rein in its overheated economy. Although the auto sector hasn't been specifically targeted, the government's bid to restrict credit growth of all kinds has hit car buyers especially hard. Today just 10% of car purchases are financed with loans, down from 35% a year ago, says Automotive Resources Asia Ltd., a Beijing consultancy. "The current loan policy is too strict," grouses Zhang Yifei, a Ford salesman at Shanghai Jiahua Motor. Manufacturers say automobile dealers are also trimming inventory because banks are denying them loans they need for working capital. And government agencies and state-owned companies, which account for about 40% of auto sales, have cut back on purchases voluntarily in support of government measures to dampen investment.
The abrupt slowdown has come as a serious shock for foreign carmakers, who have been pinning their hopes for global growth on China. In the past year, top auto executives from Europe, the U.S., and Japan have flocked to the mainland to announce ambitious expansion plans. GM wants to spend $3 billion by 2007 to double its production capacity in China, to 1.3 million cars and trucks, and it expects to introduce 20 new models over that time. Volkswagen is stumping up $6.3 billion to double capacity to 1.6 million vehicles by 2008. Relative newcomer Ford Motor Co. (F) plans to invest $1 billion on expansion in China, including a new plant in Nanjing, while Toyota Motor Corp. (TM) has earmarked $730 million to build Camrys in a new factory in Guangzhou and to expand capacity at its Tianjin plant by 74%. Together, nine big international manufacturers plan to spend a total of $9.7 billion in China between 2003 and 2007, doubling the country's production capacity to 5 million passenger cars annually, according to consultancy A.T. Kearney Inc. (EDS)
One of the most severely hit by the slowdown has been Volkswagen, the country's largest carmaker, with 30% of the market. VW's Shanghai plant saw year-on-year sales drop 18.9% in August, to just 26,000 cars, according to press reports. Sluggish demand spurred VW to dial back its sales forecast for this year. Initially, the company expected to sell 830,000 Passats, Golfs, Audis, and other vehicles. Today VW says it might sell as few as 700,000, compared with 697,000 last year. That means VW probably won't match the $680 million profit it earned in China in 2003. To shore up its bottom line, the group has announced plans to cut Chinese costs by $480 million by the end of 2005, though VW declined to provide details.
It's not just the multinationals that are suffering. Hangzhou's Geely Group Co., China's largest private auto maker with no foreign ties, predicted early this year it would double its sales, to 160,000 cars, in 2004. "Given the current market weakness, that's unrealistic," says spokesman Zhong Xiaodong. The company today is shooting for 120,000.
To keep the metal moving, auto makers have cut their prices. In May, GM slashed nearly $5,000 from the sticker price of its midsize Buick Regal sedan, to $35,900, and lopped $3,500 off its most expensive GL8 executive wagon, to $42,000. Volkswagen followed suit in June, cutting prices on seven models by as much as 11%. On Sept. 6, Hyundai announced across-the-board price cuts of 10%. Now its entry-level Elantra sedan starts at just $13,600 and its midsize Sonata ranges from $18,100 to $27,700. Toyota is offering $600 cash rebates on its Corolla and VIOS models.
Those cuts have had an unintended effect. Although sales of discounted cars typically jump, the overall market has been hurt as many customers wait for even deeper discounts. "Buyers are just sitting on the sidelines," laments GM's Murtaugh. Lindsae Li, for instance, has been shopping for a family car so she can drive her 12-year-old daughter to school, a long taxi ride from their home. For three months, Li has been prowling showrooms but still plans to hold off for another month. Time to buy? No way. "Prices are falling, and there's room for more cuts," she says.
Meanwhile, carmakers are looking for ways to save money. Manufacturers "come to us very frequently asking for price reductions," says Chen Jinya, president of parts maker Delphi Automotive Systems (China) (DPH). So far, though, parts makers haven't been badly hurt, since the auto manufacturers have yet to really slam the brakes on production.
Others are trying to skirt the banks and offer automotive loans on their own. In August, GM's finance subsidiary, General Motors Acceptance Corp. launched China's first dedicated auto-loan venture in conjunction with Shanghai Automotive Industry Corp, its manufacturing partner. VW in September began offering financing through its dealerships in Beijing, while Ford and Daimler Chrysler (DCX) are planning similar schemes to help widen the customer pool.
It's too soon to tell whether the slowdown represents deeper problems that could force auto makers to reconsider their plans for China. The last time sales slumped, in early 2000, the market roared back after just three months. This time, though, there's far more capacity -- and the government's push to rein in economic growth has just started. Still, executives and analysts insist that while the market is going through a tough period, there's no reason to doubt China's potential. "It's just a bump in the road," says Yale Zhang, director for emerging markets at consultancy CSM Worldwide. In China, though, the potholes can be very deep.
By Frederik Balfour in Shanghai, with Chen Wu in Hong Kong