Global Automakers Are Expanding Despite China's Slow Sales

GM, VW and Volvo Are Betting on Future Demand With New Plants

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International automakers are shrugging off the sharp sales slowdown in China this year, reports Automotive News China.

Despite flat sales and soft vehicle prices, automakers are focused on China's long-term growth prospects. In the past two weeks alone, four companies moved ahead with plans to expand production:

  • Volvo Car Corp. confirmed that it will build its second China plant in the northeast city of Daqing.
  • Shanghai General Motors Co. disclosed plans to build a plant capable of producing 300,000 vehicles a year in Shenyang.
  • Daimler AG and Beijing Automotive Industry Holding Corp. signed a 2 billion euro deal to expand vehicle production, build an engine plant and construct an r&d center in Beijing.
  • Chinese regulators approved Volkswagen AG's proposal to build two assembly plants, each able to produce as many as 300,000 vehicles.

Automakers are moving ahead with these projects even though China's auto market is slumping. Sales of light vehicles, including cars and light commercial vehicles, declined 1.4% in May compared to May 2010 to 1.3 million units, according to J.D. Power and Associates. It was the first sales decline in 27 months, J.D. Power reports.

The automakers are betting that the sales slowdown is temporary. China's government is forecasting that the economy will grow 8.5 % this year.

"Since the average car ownership rate in China is still below 50 units for 1,000 people, as long as you believe in the growth potential of the Chinese economy, the prospect of the market here is still bright," said John Zeng, J.D. Power's forecasting director for Asia Pacific.

But warning flags are flying: Inflation topped 5% in May while vehicle prices are declining. Normally, that would be a signal to automakers to delay expansion.

But automakers have the flexibility to adjust their production plans, Mr. Zeng noted. Because these plants will be built gradually over three to four years, the automakers can slow or even halt their expansion.

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