Fewer Products, Price Cuts Slowing Sales in China, Says CSM Worldwide

DETROIT, Nov. 16, 2004 -- With the China car market in the midst of a sales slow down since May of 2004, many analysts, investors and industry watchers are speculating as to what is happening in the world's biggest growth market. China expert Yale Zhang, director of emerging market vehicle forecasts at CSM - Shanghai, has identified combined factors that have resulted in the slow down.

"There are several major reasons for the slow down, including economy adjustments and tighter loan controls," said Zhang. "But the big factor ignored in many analyses is simply fewer new products in 2004 as compared to 2003."

In 2003, 27 new models debuted in China, including several high-volume products such as the Honda Accord and Fit, Buick Excelle and Regal, Hyundai Elantra, Southeast Lioncel, Mazda M6 and Chery-QQ. All of these vehicles strongly stimulated new-vehicle demand. There have been 20 models that debuted in 2004, but only the Peugeot 307 and Toyota Corolla can be regarded as high-volume products.

Demand also has been affected by government-driven economic adjustments to manage the pace of growth and plan a soft landing for China's economy. Institutional buyers, accounting for 40 percent of D and E-segment business car purchases, now have less budget, private entrepreneurs have started to purchase less, and tighter loan controls make car financing more difficult.

Other factors cited by Zhang include less pent-up demand among the richer class; continuous increases in fuel prices since July 2003; and traffic problems and infrastructure stress getting worse in large cities. Shanghai, China's third-largest market, may not have any demand growth in 2004 largely because of a special tax on non-Shanghai cars driving in the city and rumors of a plate fee cancellation. Finally, as the market continues to develop, consumers are becoming more price sensitive.

In fact, frequent price cuts have resulted in a wait-and-see psychology among many potential car buyers in China. "Automakers seldom cut their prices before 2002, and that year they cut prices one time," said Zhang. "In 2003, customers started to hear about two major price cuts per year, and now, in 2004, prices are cut every month." The result, according to Zhang, is a consumer mindset that thinks about how much money can be saved by waiting, and the reasonable action becomes delaying the purchase.

Looking to the future, CSM Worldwide maintains a moderate optimism for 2005 and 2006, and forecasts 10 percent growth in light vehicle sales each year. If the economy slows down further and investment controls do not loosen, however, CSM's alternative forecast scenario calls for single-digit growth in 2005, with a rebound taking shape in 2006.

CSM Worldwide (http://www.csmauto.com/ ) supports more than 350 of the world's top automakers, suppliers and financial organizations with global market intelligence and forecasting services. With corporate offices in Detroit, CSM Worldwide covers the global automotive environment from Grand Rapids, Lansing, Frankfurt, London, Paris, Shanghai, Tokyo, Sao Paulo, Bangalore, Budapest and Singapore.