Car Sales Likely to Be Flat in China This Year

Government Clamps Down on Overcapacity, Leading to New Rules for Foreign Auto Brands

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Car sales in China may be off to their worst start in seven years as a slowing economy and record gasoline prices keep consumers away from dealerships.

Deliveries of light vehicles, including SUVs and light-goods vans, in the first two months of 2012 fell 3% from the year-earlier period, based on the median estimate of five analysts surveyed by Bloomberg.

That would be the biggest drop since 2005, when they fell 8.9%, according to the China Association of Automobile Manufacturers, which will release industry data this month.

In China, foreign automakers face tougher regulations as the government clamps down on overcapacity.

"The days of China's vehicle sales going through the roof are over," said Huang Wenlong, an analyst in Hong Kong with BOC International Holdings Ltd. "I don't think the overall economic situation is that optimistic."

On Monday, Premier Wen Jiabao told the nation's legislature that China would control construction of assembly plants and encourage automotive mergers.

The country also will encourage the scrapping of old vehicles, according to a separate report by the nation's top economic planner.

China's monthly passenger-vehicle deliveries fell 24% in January, to 1.2 million units, the most in more than seven years, after an earlier-than-usual Lunar New Year holiday season deprived dealers of a week's worth of sales. February sales will be 27% higher than a year earlier, according to the median analyst estimate in the Bloomberg survey.

Economists and analysts typically combine statistics for January and February to remove the distortion caused by the holiday, which can fall in either month, depending on the lunar calendar.

In January, CAAM predicted that the country's passenger-car sales may rise 9.5% this year, to 15.9 million units.

"The best scenario is for annual car sales to remain flat, even if the automakers try harder in the latter half," said Zhang Xin, an analyst with Guotai Junan Securities Co. in Beijing. "The current official forecast for about 10% growth doesn't look realistic."

China's gross domestic product expanded 8.9% in the fourth quarter, vs. 9.1% in the third quarter, as the government waged a campaign to tame gains in consumer and housing prices. GDP growth will be about 8.5% this year, according to the Ministry of Industry and Information Technology, the slowest since the global financial crisis in 2008.

"There are no incentives for consumers to buy," said Cui Dongshu, Tianjin, deputy secretary general of China's Passenger Car Association, an industry group. "They worry about their income prospects, and there are more and more people delaying their purchase."

Competition among automakers may further intensify if the government follows through on its proposal to stop buying from foreign makers. All models approved for purchase by state agencies this year will be limited to Chinese brands, according to a recent proposal disclosed by the industry ministry.

Dongfeng Motor Corp. and Great Wall Motor Co. were among those whose shares surged Feb. 27 on speculation that the government, the nation's biggest buyer of vehicles, is stepping up efforts to protect the domestic industry as manufacturers struggle to compete against global producers, such as General Motors and Volkswagen.

China stopped also offering some incentives on investments from foreign automakers this year to deter overcapacity.

Global automakers are counting on a rebound in China to counteract a soft market in Europe, where sales are expected to decline for a fifth straight year. Foreign brands accounted for nine of the top 10 models by sales in China last year, led by GM's Buick Excelle with 253,500 vehicles, followed by the VW Lavida with 247,500.

On Feb. 24, Ford opened an assembly plant in China, increasing the automaker's manufacturing capacity there by a third, to more than 600,000 vehicles annually. Last year, Ford sales rose 7%, to 519,390 units. GM, the biggest overseas automaker in China, is poised to receive approval to build a factory with annual production capacity of 300,000 vehicles.

--Bloomberg News--

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