Price wars may backfire on China's car industry

August 27, 2002

SHANGHAI Tiffany Wu writing for Reuteurs reported that most major Chinese auto makers logged robust profits in the first half of 2002 as a round of price cuts attracted buyers, but industry executives and analysts said on Monday discounts can be a double-edged sword.

The price cuts punished profit margins and sales could start to suffer if bargain-loving Chinese buyers hold back on purchases in expectation prices will keep falling, analysts said.

Five of China's seven domestically listed vehicle producers reported higher profits for the first six months of 2001.

The number of autos sold in the first half rose 36 percent and restored the confidence of China's producers after sales had faltered late last year as people waited for cheaper imports following China's accession to the World Trade Organization.

"In the first half of the year, the car market relied mainly on huge price cuts to maintain high growth, but this stimulus will fade with time as market prices realign," said a research report by domestic brokerage Xiangcai Securities.

Analysts said they expected auto makers to post good growth in full-year profits, but slower than that of the first half. Car sales would rise up to 40 percent to one million for the year, helped by an economy the central bank forecasts will grow over 7.5 percent.

China has agreed to implement another round of tariff cuts early next year in line with WTO commitments, which could slow sales towards the end of this year, analysts said. China is to cut duties to 25 percent by 2006 from 40-50 percent.

Shares in most auto firms have outperformed the wider markets. Minivan and truck maker Jiangling Motors Corp Ltd, which posted a first-half net profit rise of 85 percent, is up 43 percent since June 1, versus an 18-percent rise in the Shenzhen B share index.

Compact and minivan maker Chongqing Changan Automobile Co Ltd, whose profits rose 41 percent, saw its stock gain 38 percent since June 1.

Driver of growth

China has designated the auto sector a "pillar industry" so investors had reason to be optimistic, analysts said.

"At present, our vehicle manufacturing industry accounts for one percent of GDP, far short of that of developed companies," Xu Jianyi, a deputy director in the transportation department of the State Statistical Bureau, was quoted by the Shanghai Securities News as saying last week.

In addition, China's 1.3 billion population boasted only 1.5 cars per 1,000 people last year against a global average of more than 90.

Foreign car makers have formed joint ventures with domestic partners hoping robust sales in China will offset a global slump.

"Everyone had a pretty good first half, but we outgrew the market," said Daphne Zheng, China spokeswoman for General Motors Corp. "For the second half, we expect to keep up the momentum."

GM is the second biggest foreign automaker in China by volume. Its first-half sales nearly tripled to 47,818 vehicles.

The price war was sparked partly by the threat of more sophisticated foreign models and mostly hurt small and less cost-efficient car makers.

China has 103 auto firms but many are tiny and lose money. Five makers produced 37 percent of last year's output.

Slashed prices at compact car maker Tianjin Automotive Xiali Co Ltd, for example, boosted sales by 15 percent, but the firm posted a huge first-half loss as it struggled to lower costs.

"The second half is a slow season and companies are likely to cut prices again. So profit growth won't match sales growth," said Guotai Junan Securities analyst Zhang Xin.

She estimated auto industry profits would rise about 20 percent for the year. China is due to issue more car import quotas in September or October, which could hurt domestic sales.

China's first half auto sales were 1.54 million, up 36.21 percent year on year. Car imports rose 23.5 percent but were still small at 30,026, the China Automobile Association said.

"We expect the market to continue the strong growth in the second half," said Volkswagen AG's China spokesman Michael Wilkes. "We don't see any hesitation from customers." Volkswagen is China's top passenger car maker and sells one out of every two sedans in the country through joint ventures.