China has largely navigated its way through the global economic crisis and automakers are increasingly eyeing the country for growth, which is why a sign of weakness in the country’s second fiscal quarter has left investors a little unnerved.
The Chinese economy grew at an annual rate of 10.3% in the second quarter of this year, compared to 11.9% the year before, as government efforts to cool the housing market and infrastructure investment begin to bite.
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For investors, the slowdown comes as many are looking to China to sustain a global economy that is still faltering in the US and Europe.
Despite the slowdown, several Chinese manufacturers nonetheless recently reported substantial sales increases in the first half of this year.
FAW Group built 1.228m vehicles (up 50.4% year on year) and sold 1.242m (+44%) in the first half of 2010.
Revenue at the company, one of China’s four largest auto groups, surged 62% to CNY131.36bn, according to reports by SinoCast. FAW sold 530,000 of its own brand vehicles, up 53.64% and five percentage points more than the industry average.
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By GlobalDataSales of Jiefang medium and heavy trucks rose 116.5% to a segment leading 153,000 units. The automaker sold 245,000 sedans, up 29.49%. Sales of Besturn cars soared 115% to 70,000.
Joint ventures between FAW Group and foreign partners contributed much to the H1 volume rise. FAW-Volkswagen Automobile, Tianjin FAW Toyota Motor and FAW Mazda Motor Sales sold 411,000 (+35%), 240,000, (+42.7%) and 59,000 (+41%) vehicles, respectively.
Meanwhile, Changan Auto said H1 net profit would grow up to 163% on sales volume up 47.6% to 974,499 vehicles.
Not all is rosy in the Chinese garden however. Earlier this year, the World Economic Forum’s Global Risk Report 2010 warned that any loss in China’s growth momentum could adversely affect global capital and commodity markets.
“The Chinese government faces a number of challenges,” the report noted. “The need to increase domestic demand to counter the loss in exports and the need to maintain a stable renminbi [currency] given China’s vast accumulation of foreign reserves.
“The implications of a fall in China’s growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path.”
With Europe facing a fresh banking crisis and unemployment in the US still double what it was in early 2008, it is safe to say that the global economy has not yet reached that resilient path.
China’s premier, Wen Jiabao, attempted to allay fears putting the second quarter sluggishness down to the government’s intervention to slow down the country’s rapid expansion to a manageable pace.
“China’s economy in general is in-line with the government macroeconomic regulation and control,” Wen said. “Major efforts will be made to handle the relations among maintaining steady and fast growth, restructuring the economy and managing well the inflation expectations. China will continue to adopt a proactive fiscal policy.”
Gady Epstein, Beijing bureau chief for Forbes magazine, questioned investors’ thoughts on the slowdown.
“We see reports that China’s GDP growth slowed to only 10.3% in the second quarter this year. That’s far from a catastrophic slowdown; more like a welcome cooling off of a superheated, investment-driven economy,” Epstein said.
Some experts say slower growth will help to promote efforts to restructure China’s economy by boosting domestic consumption and reducing reliance on exports and resource-intensive investment.
Qu Hongbin, an economist for HSBC, said the predictions about a hard landing in China were “overplayed”, adding: “This is just a slowdown towards more sustainable growth, not a meltdown.”
Sheng Laiyun, spokesman for China’s National Bureau of Statistics, reiterated the government’s relaxed attitude.
“The slowing will help our economy avoid overheating and assist in the transformation of our economic model,” Laiyun said.
While analysts have focused on the slowdown, China’s exports and consumption have remained robust, with the government also announcing this week that retail sales grew by 18.3% in June compared to the same month last year. Exports, meanwhile, rose by 44% in the month.
That is promising for companies from Europe and the US who are keen to unlock the door to ever more affluent Chinese consumers.
For overseas car makers and parts suppliers, China still represents genuine growth opportunity and several are active in the market, while joint ventures are becoming increasingly common.
For example, BMW vehicle sales in China passed 75,000 units in the first half of this year, making the market the automaker’s third largest.
Shanghai GM Dong Yue Motors, a joint venture by Shanghai General Motors, General Motors China and Shanghai Automotive Industry Corporation Group (SAIC), has also started building its new plant in the Yantai Development Zone.
The project is backed by USD310m of investment, local media reports said. The funds will be used to build an environment-friendly plant with vehicle body, paint and final assembly shops and a distribution centre and auxiliary facilities.
French parts maker Faurecia has equally finalised a deal with Chinese groups Geely and Limin to deliver interior systems and automotive exteriors.
The agreement covers delivery to all Geely brands in China and includes the set up of several joint ventures to be held by Faurecia, Limin and Geely, that will supply the five new Geely plants currently being built in China.
And China’s Zhejiang Geely Holding Group, which is buying Ford Motor’s Volvo car unit for a reported US$1.8bn, has said it aims to sell 150,000 Volvo cars annually in China by 2015.
The company plans to assemble the Volvo XC60 locally by the end of 2010, followed by the S60 model in 2011.
The S40 and S80 models, currently assembled by a Changan-Ford-Mazda JV, will also likely be transferred to a new plant.
Mazda Motor chief executive Takashi Yamanouchi said recently he wanted a joint venture in China in which the automaker held the maximum 50% allowed instead of the 15% it now owns in the current three-way venture.
Mazda has said it is awaiting regulatory approval to restructure its current joint venture with Ford and Chongqing Changan Automobile but had declined to provide further details.
“Ideally, we would have a joint venture with a 50% stake,” Yamanouchi said. Sources had told Reuters in May that Ford and Mazda both wanted separate joint ventures with Changan, holding a 50% stake each.
“Chinese economic news never disappoints in its ability to be conflicting and confounding,” said Forbes‘ Epstein. “As a general rule, don’t believe anybody who says they know for sure, but I’ll venture to say it is not time to worry yet.”
Indeed, China is likely to drive global growth for years to come and businesses across the globe are positioning themselves for a surge of affluent middle class consumers during the next 20 years.
If anyone can ride out a rough current right now, it would appear to be China.
