China Auto Market in ‘Downward Spiral,’ Japan Group Says

China’s vehicle market has shown signs of a “downward spiral” that will eventually hit Japanese carmakers, according to the head of Japan’s auto association.

“There’s excessive competition and carmakers are building excessive capacity, and to raise utilization of the plants, they will engage in excessive selling,” Fumihiko Ike, chairman of Japan Automobile Manufacturers Association, told reporters in Tokyo Thursday.

Japanese automakers are coming off a record first-half in China, cementing a comeback from anti-Japanese protests in 2012, even as competitors like Volkswagen AG and Hyundai Motor Co. posted sales declines. The gains are a bright spot in the world’s largest car market, which is headed for the slowest expansion in four years as economic growth moderates and cities cap vehicle registrations.

The slump in demand has prompted automakers to cut prices, threatening profit margins.

The average level of capacity utilization across international auto brands has fallen to 94.3 percent in the first half of this year, dropping significantly below 100 percent, according to Sanford C. Bernstein analysts led by Robin Zhu. Foreign carmakers will have to accept lower utilization rates in future, they said.

Japanese car brands reached a combined market share of 20 percent as of May, matching levels seen before 2012, when political tensions escalated over a territorial dispute, according to researcher LMC Automotive.

“Japanese car sales are solid now,” said Ike, who is also chairman of Honda Motor Co. “But sooner or later, as the overall demand cools, they will be also affected by excessive competition. We can’t be optimistic.”

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