With China's car market up 24% so far this year, you'd think these would be fat times for auto manufacturers. But many of the mainland's carmakers are hurting. Sales are falling far short of lofty targets they had set for the year, driving prices down by as much as 15% and squeezing margins. The price wars "exert a lot of pressure on car companies," says Lawrence Ang, executive director of Geely Automotive, which has cut its production target for the year from 240,000 cars to 190,000. "Margins were not very high, and raw materials prices are up. So it's very difficult to make that all up by just cutting costs."
It's not only domestic brands that are feeling the pain. General Motors' (GM) Shanghai operation that turns out Buicks and Chevrolets is set to finish the year 5% below its production targets, while Guangzhou Honda (which makes Accord sedans and Fit compacts) is headed for an 18% shortfall, Citigroup (C) analyst Charles Cheung estimates. A Peugeot joint venture is 21% below target; South Korea's Hyundai Motor is down 29%. "The 2007 car market has disappointed the majority of car assemblers in China," Cheung wrote in an Oct. 5 report.
The biggest problems are in small cars. A year ago, that segment seemed to offer the best prospects for growth as lower-income buyers started flocking to showrooms. But as it turns out, there are fewer customers at the bottom end of the market than automakers had anticipated. So sales of microcars—with engines smaller than 1 liter—increased just 7% through August. Subcompacts (a bit bigger than micros) are up by only 4%, says market researcher J.D. Power & Associates (MHP). And as more manufacturers cut prices, customers are holding off buying. "I want to wait and see how low the price goes," says Wang Jin, a 25-year-old Beijing native eyeballing a 1.6 liter Peugeot 307. It's now selling for $16,000, but he hopes to bag one for just over $14,000.
BIGGER IS BETTER
Competition is getting fierce, too. Nearly every automaker on earth has set up shop in China, and some 80 brands are now available in the country. That has helped push gross margins across the industry down from 15.1% last year to 8.8% in the first half of 2007, estimates Citigroup. "It is a confusing picture—there is very strong growth, and yet people are cutting prices and margins are falling," says Michael J. Dunne, Shanghai-based managing director for China at J.D. Power. "Everyone is clawing for what they can get."
Even as the market for the smallest cars has been a disappointment, bigger models are still moving. Sales of compacts are up by 46%, and midsize sedans have jumped 35%, J.D. Power reports. That has helped manufacturers of larger cars such as Volkswagen (VLKAY), which saw its sales in China and Hong Kong jump 30% in the first nine months. VW has boosted its share from 15% to 18%, widening its lead over No. 2 GM, with 9.8%. Toyota Motor (TM) is another big winner. Sales of its $43,000-plus Crown luxury sedan, its midsize Camry (priced from $26,373 to $35,973), and smaller autos were up 40% through August. With about 8% of the market, the company is in a dead heat with Chery and Honda for China's No. 3 spot. "High-end cars are much cheaper than before," says Hua Xue, CEO of auto industry Web site Cheshi.com.cn. "So buyers are more willing to buy better cars."
Five Chinese carmakers will exhibit at Detroit auto show
More Chinese companies than ever will attend the January event, The Detroit News wrote on Oct. 5. But their cars aren't destined for the U.S. yet, and the paper questions whether their safety standards are up to snuff.
By Dexter Roberts and Ian Rowley