China's Car-Industry Slowdown Blip Before Next Boom

With Forecast for Annual Sales of 30M By 2020, Automakers Race to Grow in Chinese Market

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It was inevitable. China was too hot not to cool down.

And this country's once-torrid auto market, which surged 54% in 2009 and 33% in 2010, hasn't just slowed. Sales actually fell in the first quarter.

But global automakers are more gung-ho than ever, and will lavish increasing amounts of money and executive attention on the world's largest market.

"There is tremendous growth coming," Renault-Nissan CEO Carlos Ghosn said last week at the Beijing auto show. "China is not a source of worry."

No, China is not a bust. In the plans of global automakers, China is booming, booming, booming. For proof, look at the blitz of assembly plants, expanded dealer networks and new models announced at the Beijing show. Underlying the optimism are expectations that sales in the big cities of China's vast interior are poised for takeoff.

"In China there are 300 cities with more than a million residents, and we are present in only 187 cities," said Peter Schwarzenbauer, Audi's global sales chief. "So we are still scratching the surface."

The consensus from Detroit to Wolfsburg to Tokyo: China's still hot, but its new normal will be annual market growth of 5% to 10% rather than the double digits of the past. That's just fine by most executives, who prefer moderate but steady growth to peaks and valleys.

"The growth was too much, too quickly," said Fiat Chrysler CEO Sergio Marchionne.

A slowing economy, high gasoline prices and the expiration of government incentives took a bite.

But things are moving fast enough. For perspective, go back to the Automotive News World Congress in Detroit in January 2011. Dazong Wang, a former General Motors executive and then the president of Beijing Automotive, caused a roomful of attendees to gasp when he predicted that sales would hit 40 million units, including commercial and 30 million passenger vehicles, by 2020.

Sales had been about 18 million in 2010, and growth has slowed dramatically since. In 2011, sales rose only 2.5%, to 18.5 million units. And in the first quarter, total sales slid 3.4%, to 4.79 million units, while light-vehicle sales dropped 1%.

So is last year's giddy forecast by Mr. Wang ridiculed as irrational exuberance? No, it's just about the consensus: 40 million vehicles in eight years.

"It's the common view," said Daimler CEO Dieter Zetsche. "Everybody might be wrong, but assuming an average GDP growth of 8%, you almost can calculate how many people will come from an ... agricultural background to an entry-industrial background, and how many people will go from this position to middle class and how many people will rise to a more affluent level of purchasing power. And with that premise, you can almost make a calculation of how much car sales will increase. And it is reasonable."

The consequences are huge for the world's automakers. If they just cling to existing market shares, their volumes will double. The center of their universe will shift to China.

For Mr. Zetsche's Mercedes-Benz, for example, the U.S. and German markets are bigger than China's, though not by much. What happens when passenger-vehicle market grows from 14 million or 15 million units to that 30 million?

"China will be our No. 1," said Joachim Schmidt, Mercedes' head of global sales. "In the U.S., sales are 14 million this year and 15 million next year, but not 30 million."

That is more or less the situation for any foreign automaker in China. They won't need to poach customers from other brands to grow in such an environment, although latecomers such as Ford and Chrysler will try to steal buyers.

And if you think the global industry has tilted to China today, wait until it is twice the size of the U.S. market. And that won't be very long.

There are still risks, including a possible consolidation of domestic Chinese brands and trouble for any automaker that expands too quickly.

In the first quarter, light-vehicle sales in China dipped 1%, to 3.77 million units, according to the China Association of Automobile Manufacturers. Last year, sales of passenger vehicles climbed 5.2%, to 14.5 million, while total vehicle sales, including buses and trucks, inched ahead just 2.5%, to 18.5 million. In a role reversal, China's tepid growth in 2011 actually trailed the 10% surge in U.S. light-vehicle sales.

But the upbeat attitude was palpable at the Beijing show. Automakers announced dramatic plans to increase production and dealership networks.

The association predicts that total sales will climb 8% this year, to about 20 million units. But Shi Jianhua, the group's vice secretary general, cautioned that that may be overly optimistic. Automakers expect that inland sales will take off as the more affluent areas along the coast become saturated with cars.

Automakers predict the next big boom will happen in Tier 2 and Tier 3 cities: those with 500,000 to 2 million people. Of China's 660 urban centers, only four are Tier 1 cities: Beijing, Shanghai, Guangzhou and Shenzhen. The others may have large populations but trail in per-capita income, infrastructure and cosmopolitan culture.

Those Tier 2 and Tier 3 metropolises are the sweet zone for new sales.

"They're just entering the strong growth period of their own," said Jim Press, a former Toyota and Chrysler executive now heading the China operations of U.S. dealership group McLarty Automotive. "Many of them do not even have dealerships yet. This is the gold rush of 2012."

McLarty started with 10 stores in China last year and plans to increase to 23 this year.

--Automotive News Europe--

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