The long-term outlook for car prices will favor consumers as China’s dozen plus automakers vie to increase their market shares in this highly competitive market.

Automobile sales in China have endured a dramatic slowdown since the first quarter of this year.

The government’s efforts to slow economic growth have meant tighter credit, while consumers haven’t been buying on expectations that prices will drop further.

After reaching a record 226,000 units in March, sales have fallen each successive month until August, when they grew a mere 0.2 percent month on month to 170,300 units, according to the China Association of Automobile Manufacturers. Sedans currently account for 44 percent of all automobiles sold on the mainland.

“We do see some degree of bottoming out in sedan prices in China,” KPMG director of financial advisory services Thomas Stanley said. “It’s getting increasingly hard to cut prices any further while maintaining a reasonable margin.”

While China’s passenger car industry is highly fragmented, the joint-ventures of Volkswagen AG and General Motors Corp. account for 40 percent of the total sedan market. Japanese manufacturers, which are relatively new to the market, have a 24 percent share— as have local manufacturers combined, such as Geely Automobile Holdings Ltd. and Chery Automobile.

“Current demand for automobiles is growing at a much slower pace,” said Stanley, citing new regulations governing loans to buy cars and a market largely sidelined on hopes that automakers will further trim their prices.

New rules on allocating automotive loans were announced in April as part of the government’s efforts to cool China’s booming economy. These regulations proved to be a significant damper on new car sales, said Stanley.

Automobile loans accounted for only 10 percent of all sedan purchases in the first-half of 2004 compared with 30 percent for the whole of 2003. Stanley said the new measures, however, would help reduce the amount of loan defaults, which is said to be around 40 percent to 50 percent of all vehicle loans.

Several months of price cuts have also conditioned consumers to expect more reductions.

Stanley said the cuts had been aimed at consolidating market shares. “Car companies are in a life-and-death struggle for market share. Everyone has been hooked on growth and the goal of capturing more market share.”

Such emphasis on growth will force a decline in profit margins, which currently stand at 20 percent to 30 percent across the passenger car market, according to KPMG.

“It is safe to say that profit margins are under much more pressure now,” said Stanley, adding that the government has said it wants only three to four major players in China’s automobile market in the long run.

“The consolidation process among auto manufacturers will happen gradually over the next decade,” he said.

Stanley expects a modest rise in sedan sales in the second half and next year, leading to stabilizing prices.

Sales will likely improve as many believe that the government’s tightening measures are temporary.

“People are cautiously optimistic about the market next year,” he said. “Demand will pick up again.”

KPMG expects sedan sales to rise 15 percent this year after two million units were sold last year, a rise of 82 percent from 2002.

Beyond next year, however, sedan prices will likely experience further declines as market competition intensifies with the industry consolidating into three to four manufacturers.

“Prices will continue to come under pressure,” said Stanley.

(Shenzhen Daily October 13, 2004)