When a chemical warehouse in Tianjin, China, exploded this month, destroying some 10,000 parked vehicles, cynics suggested that the disaster might actually be for the best, given the massive glut of unsold cars sitting on Chinese lots. Yet with the turmoil in China's stock markets continuing to pummel the troubled auto sector, it seems that any true industry correction will require a considerably larger explosion. The situation leaves the world's biggest automakers torn between their desire for short-term dominance in China and the need for a painful correction to stabilize the world's largest car market for them.
There is no understating the importance of China to the big car producers: With only 106 cars per 1,000 Chinese right now, analysts say demand still has the potential to exceed 35 million units by 2020. Yet rising inventories have been putting pressure on new-car dealers, resulting in severe price-cutting and open rebellion between the China Automobile Dealers Association and manufacturers late last year. By last month, when China's stock market began melting down, import car dealers were facing as much as 143 days of supply. With new car sales falling nearly 7 percent in July and headed toward their first net-negative year in recent memory, it seems likely that oversupply will haunt China's auto market for the foreseeable future.