Mon, Jul 12, 2004 - Page 10 News List

China's automakers start to slide


China's auto makers experienced a "black May" and a lackluster June of falling sales and bulging inventories, leading to concerns that many may have to drop out of the market, state media reported yesterday.

Auto sales last month slipped 7.1 percent from the month before to 164,852 units for the third monthly decline, the China Business Weekly said, citing figures from the China Association of Automobile Manufacturers (CAAM).

Following an even steeper 20 percent plunge in May, this has caused dealers to worry that the auto market has reached a turning point at which the weakest competitors will be "washed out," the Xinhua news agency said.

"Behind the painful situation lies the chance of [consolidating] the national auto industry, which may take part in global competition afterwards," Xinhua said, citing unnamed experts.

Even the biggest car makers are struggling, as the CAAM said previously that the top five Chinese auto companies recorded a decrease in sales in May from the month earlier ranging between 7.4 and 25.1 percent.

The Chinese government has tried for the past decade to weed out the smallest and most inefficient auto makers, who make up the majority of the 123 companies in the industry.

Many of the lightweights were set up by local governments as prestige projects, but now turn out a tiny number of autos without any of the benefits of economies of scale.

Policy makers in Beijing hope they can groom a handful of large competitive players, and the recently stagnating market may help bring this about.

Year-on-year growth in auto sales has been in abrupt decline over the past few months.

In February, sales were up 76.8 percent from the same month a year earlier, but the growth had dropped sharply to just 2.2 percent in June, according to data from the CAAM.

The result of the decline in auto sales can be seen in the form of large numbers of newly-produced autos collecting dust because they have no buyers.

The auto manufacturing association reported that more than 140,000 sedans were piling up in the inventories as of the end of last month, the China Business Weekly said.

Predictions that the auto industry will have to consolidate have been fueled in recent months by new macroeconomic policies seen as being designed to force revolutionary change.

Concerned about overcapacity in the auto industry, policy makers in Beijing have been engaged in a lengthy effort to curb auto loans.

And last month, the top economic planning body published a long-awaited blueprint for the auto industry, raising the bar for companies wishing to engage in auto manufacturing.

The new regulations include a requirement that any new manufacturing company must have a minimum investment of 2 billion yuan (US$240 million).

One tangible result of declining sales could be a more aggressive price war for high-end autos to attract a dwindling pool of consumers, according to the state media.

"The price war in the low-end is almost finished, which leaves little space for further price cutting, but the medium-end market is different," auto analyst Xie Wei told the China Business Weekly.

"The `war' has just started, and the trend will continue for at least a year."

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