It had to happen sometime: after several years of stratospheric growth, the Chinese vehicle industry has come back to earth with a bump - and found itself facing a grim reality of weak demand and cut-throat competition that could persist well into the fu
It had to happen sometime: after several years of stratospheric growth, the Chinese vehicle industry has come back to earth with a bump - and found itself facing a grim reality of weak demand and cut-throat competition that could persist well into the future.
Even before the western financial world imploded - stoking fears of a global recession that has chilled the hearts of car buyers, even in faraway China - industry analysts were expecting a slowdown in Chinese car sales this year. But by that, they meant 15 or 20 per cent growth (down from 34 per cent in 2006 and 24 per cent last year) - not low single-digits this year, and flat sales next year, as predicted recently by JD Power, the auto consultancy.
Chinese car industry growth had defied gravity for so long - rising from only 5,000 cars in 1980 to 5.8m forecast for 2008, making it the world's second largest auto market - that it was hard to imagine anything could cause such a hard landing. But that was before the credit crisis.
In many ways, Chinese car buyers ought to have been well insulated from the crisis: according to Mike Dunne of JD Power in Shanghai, 93 per cent of car purchases are still made with cash. But Li Shufu, chairman of Geely, one of China's largest automakers, says the effect is predominantly psychological. "If consumers think the global economic situation is bad, they also think maybe prices will fall," and they stop buying cars, he told the Financial Times recently in an interview. In China, no one wants to buy a car until the price is as low as possible.
But China's car industry was already highly competitive, even before the threat of further price declines. According to Dieter Seemann, commercial executive director of Shanghai Volkswagen, one of VW's two carmaking joint ventures, China has 81 automotive brands compared with 47 in the US - the world's largest car market - and 45 carmakers compared to 15 in the US. VW says prices fell by a staggering 37 per cent from 2001 to 2007, and forecasts further price erosion of 8 per cent from 2008 to 2010. In the short term, says Joseph Liu, General Motors' Asia-Pacific head of sales and marketing, "everyone will suffer".
But the medium- to long-term forecast is more cheerful. Nick Reilly, head of Asia-Pacific operations for GM, says market...