Blog: Dave LeggettChina's cooling market

Dave Leggett | 23 May 2011

Prospects for the vehicle market and auto industry in China are entering an uncertain phase that brings a dilemma for industry participants and forecasters. A number of negatives point to a cooling of demand. It may not be a big cooling down, but the Chinese authorities are reacting to signs of overheating in the economy – still motoring at close to 10% per annum growth – and there are also a number of negative factors impacting the new vehicle purchasing environment (such as chronic road congestion in the so-called 'tier one' cities and the loss of stimulus package incentives this year).

The dilemma for industry participants is that the Chinese automotive market has been consistently out-performing what many of the professional forecasters have been saying over the past couple of years. China's fiscal stimulus package turned out to be far more successful than many predicted. As the domestic economy surged, waves of new buyers materialised to confound the widely held view that the car market would eventually run out of steam or at least take a breather. This naturally gives rise to the notion that the forecasters will probably be getting it wrong again, that the fundamentals will drive car ownership and the vehicle market still higher and that you'd better believe it or risk being caught out with insufficient capacity and supply in the world's largest and fastest growing vehicle market.

Automakers do, though, occasionally get caught out. It happened in South America when the big economies there went south following the financial turmoil of the late-1990s. Stampedes to invest and install manufacturing capacity carry the risk of industry oversupply with an associated softening of prices and profits for all.

There was plenty of upbeat talk at last month's Shanghai Show. And there seems to be a consensus that China's long-term market prospects remain highly positive. But if there's a significant slowing coming this year, that 'correction' will provide cause for concern if it starts to look bigger than the industry has been saying thus far.

Many said at the outset of this year that the Chinese vehicle market will slow to 10% or so growth in 2011 (versus growth of a third to a whopping 18m units in 2010). If that expectation for 2011 gets revised down towards a flat market, even if that is flat on a high 2010 base for comparison, a few alarm bells will be ringing. The problem with downward revisions to market forecasts is that they are rarely correct first time and are often 'salami sliced' to progressively lower numbers. How low could we go, especially given the unprecedented boom of the last few years? Does the Chinese government have a steady and reliable hand on the economy's tiller? One thing's for sure: the China vehicle market numbers for the next few months will be awaited with even more interest than usual after April's fall.

May 2011 management briefing: BRIC markets review - China


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