Dow Jones Newswires, January 12, 2015

by Colum Murphy

DETROIT–China’s auto industry faces a second straight year of weaker growth after a sharp 2014 slowdown, according to an industry association and analysts, as car makers continue to grapple with a cooling economy and rising inventories.

The China Association of Automobile Manufacturers said Monday that it expects passenger-vehicle sales to rise 8% to 21.3 million vehicles this year, compared with 9.9% growth in 2014. While that pace is stronger than current outlooks for Europe and the U.S., it still marks a sharp slowdown from a 16% gain in 2013 and even higher rates in some previous years.

Jochen Siebert, managing director of consulting firm JSC Automotive, said Western auto makers get such a large share of profits from China, slower gains “could be a slap in their face as the market begins to stall and regulators put an end to extraordinary profits in the aftermarket business.”

Consultant IHS Automotive estimates that in 2013 China contributed about 59% of net profit at Volkswagen AG, 45% at BMW AG and 37% at General Motors Co. The car makers don’t separately disclose China profits.

BMW said China accounts for between 20% and 30% of its automotive-segment earnings, which excludes finance arm earnings. Ian Robertson, the German luxury-car maker’s global sales and marketing chief, said in an interview at the Detroit auto show that he expects BMW sales in China to rise at a moderate single-digit-percentage rate this year. Mr. Robertson said growth also was shifting among car segments, for example, to smaller luxury cars from larger models.

Volvo Car Corp. Chief Executive Håkan Samuelsson said it is important not to “over exaggerate” the effects of China’s slowdown. “It’s going to be tougher,” he said. “But there is still solid growth,” he added.

Mr. Samuelsson said growth in China’s premium-car market in 2015 of between 5% and 10% would be “more realistic.” Volvo expects its growth would outperform, but wouldn’t be as high as when its sales rose about 35% in 2014.

Analysts expect China’s slowing growth will weigh on auto sales over the course of the year. China’s gross domestic product is widely expected to rise 7.3% in 2014, the weakest since 1990, and further deceleration is likely, said economists.

“Sales growth of sedans has almost stalled in recent months because buyers of sedans are very vulnerable to the economic situation,” said Yale Zhang, managing director of consulting firm Automotive Foresight. In 2014, China’s sedan sales rose only 3% from a year earlier to 12.4 million cars.

Dealers including Xie Zongwei agree. “People are asking for greater discounts. I feel it’s getting more difficult to sell cars,” said Mr. Xie, who sells Chevrolet, Hyundai and Geely vehicles in Hebei province.

The China auto association offers a somewhat brighter outlook for commercial vehicles, which are more dependent on the property market. Overall, the group expects total sales of passenger and commercial vehicles to rise 7% to 25.13 million this year, compared with 6.9% last year.

The industry group’s estimates are largely in line with those of analysts. Business Monitor International, a unit of information-services firm Fitch Group, expects growth in China’s passenger-car sales to slow to 7% this year. LMC Automotive forecasts a 9% rise for the passenger-car market and IHS Automotive forecasts an 8% rise.

In addition to the economic deceleration, demand for cars is taking a hit from the increasing number of cities placing restrictions on car sales to tackle their worsening air-pollution and traffic problems.

In December, the affluent southern city of Shenzhen joined other urban centers in curbing car purchases. The city now caps the number of new cars at 100,000 vehicles a year, less than half of an estimated 250,000 new vehicles sold in 2014.

Cities that might follow suit this year include Chengdu, Suzhou, Nanjing and Xian, said Ways Consulting Co., a Guangzhou-based consulting firm focused on the Chinese automotive industry. Each of the cities has had more than 100 autos per kilometer on the road, said the consultancy, adding that the four cities sold more than 1.2 million new cars in the first 10 months of 2014.

The association’s figures track vehicles shipped to dealers rather than sold to consumers, and rising inventories in dealer lots suggest more cars are going unsold.

Dealers for some foreign car brands, including BMW, have complained about what they called too-high sales targets and have demanded financial support from car makers to tide them through the slowdown.

Johan de Nysschen, president of General Motors’ Cadillac unit, said dealers for the brand in China hadn’t asked for such payments. “[But] we should anticipate it. Dealers for all franchises have taken note of this development,” he said.

The latest data from the China Automobile Dealers Association show that stockpiles at China’s more than 22,000 dealerships jumped to 55 days in November, up from 44 days in October and the highest level since June 2012.

Bill Russo, managing director of consulting firm Gao Feng Advisory, advised against car companies putting all of their eggs in the China basket. But he said there weren’t too many options. “If you’re a global auto maker, where else can you go for growth other than China?”

Rose Yu and Lilian Lin contributed to this article.

Write to Rose Yu at [email protected]

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