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Sales slide a wakeup call for the industry

China’s auto market has almost slowed to a screeching halt and could shift to reverse mode soon.

Auto sales in the first seven months of the year, according to China Association of Automobile Manufacturers (CAAM) earlier last month, were flat (up only 0.4 percent) year-over-year. Sales and production were both down in the month of July, the third consecutive month that has happened. Passenger vehicle sales, at less than 1.27 million units, were down 6.6 percent to a 17-month low.

Considering that the summer months are usually slow selling seasons, January-August auto sales will likely drop year-on-year and sales for 2015 will fall for the first time since 1998.

The sudden market cool-down has been so unprecedented that OEMs and dealers of both foreign and Chinese brands have adopted extreme “bailout” measures to boost sales or cut inventory. Aside from steep manufacturer-initiated price cuts and incentives such as zero-percent financing, subsidized insurance and higher trade-in prices, they are teaming up with e-commerce providers to offer deep online discounts to move vehicles off dealership lots. Executives are being reshuffled at breakneck speed while presidents and CEOs that are lucky enough to stay on the job have taken to the streets themselves to pitch sales. Some manufacturers have extended summer furloughs past normal lengths to reduce inventory while others are actively cutting production. FAW-Volkswagen, for example, produced only half as many cars in July as it did a year ago.

According to vertical online portal autohome.com, aside from the official price cuts, dealers in major cities are offering discounts of at least 30 percent on hundreds of models. The level of discounting at the expense of profit margins is “shocking,” according to media reports quoting Luo Lei, secretary general of China Automobile Dealers Association (CADA).

The problem is, these “bailout” measures have not worked effectively against the sales slide and many 4S dealerships have been forced to close shop or sold to third-parties at bargain prices.

Weak economic data such as plunge in exports, weaker-than-estimated manufacturing and slowing credit growth have exacerbated the problems. On the day that CAAM reported July output and sales, China’s central bank devalued the Chinese currency. Earlier this week, interest rates were cut after the stock market plunged for two days in a row, reflecting the seriousness of the economic weakness.

“Challenging” has become the one word that both foreign and domestic automakers have used to describe market conditions. The slowdown clearly reflects that the old days of manufacturers making whatever volume they want and pushing inventory to dealers is over. The Chinese market, as some say, has turned from a seller’s market to a buyer’s market.

The long-term potential of the Chinese market remains but the current sales slide is a wakeup call for the industry that is used to growth. Automakers that have big capacity expansion plans will have to revisit their strategies.

The Chinese market is entering a period of fluctuations, normal for an emerging market, and that maybe good for the long-term healthy growth of the market.

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