Not just car sales may be lagging in China
When China’s economy was booming, motorists became a symbol of the nation’s new spending power. Now, falling car sales may be more a symbol of China’s steady deceleration.
Voracious demand saw China overtake the U.S. as the world’s biggest car market in 2009, spurring auto giants including Ford Motor Co. and Volkswagen AG to supercharge their production in the country. By contrast, Ford now sees a potential decline in auto sales in China for the first time in 17 years. Volkswagen suffered its first sales drop in a decade during the first half of the year.
Because car demand is often a timely indicator of consumer and business confidence, it can capture economic trends before official data.
With the auto sector second only to real estate as having the largest impact on suppliers, according to Banco Bilbao Vizcaya Argentaria SA, weakness in the industry threatens to worsen a downturn in manufacturing. A purchasing manager index for China’s factories slid in July to a five-month low.
“Declining car sales are definitely a warning sign for the Chinese economy,” said Paul Gao, McKinsey & Co.’s Shanghai-based head of automotive practice in Asia. “It’s a reflection of consumer confidence.”
New car sales fell in June for the first time in more than two years. Ford projects the market at as small as 23 million units this year, compared with 23.5 million vehicles sold last year. Hyundai Motor Co. has also said its deliveries have fallen.
The China Automobile Dealers Association last week warned that nationwide sales could drop for the first time in more than 17 years, if the country’s stock-market rout continues. The slump in equities hurts buyer sentiment, Luo Lei, deputy secretary-general of the industry trade group, said Friday.
On the ground, car dealers like Tao Jinlong are feeling the slowdown and have to work harder than ever to make a sale.
“Customers are very price sensitive,” said Tao, a sales manager at a Ford dealership in Shanghai. “They shop around more and are demanding bigger discounts, which affects our margins. We’ve also had to spend a lot more time with them to close a sale.”
The deterioration comes at a time when President Xi Jinping and Premier Li Keqiang want consumers and services to play a bigger role in driving the economy as part of a shift away from debt-fueled investment and exports.
“The first thing to go when rough waters are ahead is car sales,” said Thomas Glendinning, London-based analyst at BMI Research, a unit of the Fitch Group that also does credit ratings. “People start to think less about being conspicuous and they start to move toward more thought about value-for-money in their big purchases.”
Weaker car sales will hurt suppliers. As carmakers trim production and cut costs, the impact will ripple across the country, according to Le Xia, chief economist for Asia at BBVA in Hong Kong. Car sales made up 12.2 percent of total retail sales in June, Le said.
Le reckons that households earlier this year suspended decisions to upgrade their cars and opted instead to play the stock market, only to see their savings evaporate.
The Shanghai Composite Index rose more than 150 percent in the year through June 12, before a plunge that wiped out almost $4 trillion of market value. The index slid 10 percent last week, snapping three weeks of advances.
“Its decline is set to weigh on China’s consumption going forward,” Le said. “In fact, consumption has been the silver lining amid China’s growth slowdown.”