Auto manufacturing in China

The simple fact that China is now the world's largest consumer market has not gone unnoticed by large auto manufacturers, and incidentally many of these companies have relied heavily on the Chinese market to reach their ambitious sales projections over the last few financial quarters.

China represents a large opportunity for the automotive industry because car ownership is still relatively low nationwide (just one vehicle for every 17 people) and because the country is enjoying higher levels of expendable income in ways we have not seen before. However, if current [re-adjusted] projections hold true and China is beginning to "downshift" its annual double-digit growth, major blows could be felt by some of the largest international auto-manufacturers - no pun intended.

The truth is whenever you have an exceptionally large consumer market concentrated into one country; those consumer preferences, trends, and habits will affect the world's markets in a dramatic way. And when a large consumer market [such as China] slows its growth by even a few percentage points, manufacturers the world over will be greatly influenced. Lower car sales in China might mean big losses for preferred Western brands like Audi and Volkswagen.

Reports are emerging that Japanese auto manufacturers are taking a beating - Toyota's month-over-month Chinese sales are down 40 percent for September. Of course, a lack of recent Japanese auto sales may be attributed to a sense of increased patriotism following the September 10th announcement of Japan's Diaoyu islands "purchase". However, Japanese brands are not the only auto companies to show decreasing sales in China.

Country-wide, automobile sales fell 12.5 percent from June to July 2012 [the last month for which figures are available.] John Humphrey, a J.D. Power and Associates analyst, has suggested a slowdown in Chinese growth will reveal just how over-supplied the Chinese market is with various car brands and factories.

It seems that over the last few years, the Chinese auto industry has been putting-off a much needed shakeout - one similar to the US auto manufacturing shakeout of the early 20th century: many companies were started and only a few survived. However, it could be argued that this impending shakeout has been delayed due to extreme Chinese double-digit growth.

All together the country has the capacity [using current infrastructure] to create 28.5 million vehicles/year, but these capacities are 46 percent larger than consumers are expected to buy this year - with purchases expected at just 19.5 million cars. This current infrastructure is a combination of the country's 48 domestic brands and 47 international brands that have been building manufacturing infrastructure in China.

Those 48 domestic brands account for only 30 percent of domestic passenger car sales. Reasons for the low figures are attributed to a large consumer preference for Western auto brands like BMW, General Motors (GM), and Volkswagen.

But just who will benefit from a Chinese manufacturing shakeout?

It depends on if the shakeout is purely due to free-market preferences, or if the Chinese government will have a say in which brands dominate the Chinese market over the next five years. In Jilin Province, the government is already establishing a plan to ensure domestic brands, like FAW, remain on the market for years to come.

Jilin's government has put in place plans to help the Chinese brand FAW grow their domestic market share. Automotive News China has reported that the Jilin government will provide a subsidy of 30,000 yuan toward the purchase of FAW Group Corp. domestic brand vehicles - the subsidy is expected to last through the remainder of the year. If the Chinese government follows a similar path and begins to implement tariffs for foreign brands and subsidies for domestic brands, international automakers may be in for more trouble than they imagined.

Of course, higher prices for Western-brand cars would ultimately be passed onto the consumer, so you can expect to pay a premium for that future BWM. The real question is, will Chinese consumers be willing to pay higher premiums for foreign brand vehicles, or will this cause preference to shift towards many of the available domestic brands, like Great Wall Motor Corp?

If we begin to see a government implemented subsidy or tariff plans within the auto industry, preferences will shift toward available Chinese-brand domestic vehicles. Those available domestic brands are creating newer, more preferred model cars featuring better safety technology. Even without any government incentives, we see Chinese auto manufacturers growing in their global exports - especially to areas like Southeast Asia and Africa. Truthfully, we can expect an increase in Chinese auto manufacturing and increased global demand from Chinese auto brands as their products continue to be safer, more creative and more reliable.