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Weakening demand and China’s auto industry policy

For three months in a row sales of passenger vehicles in China declined, according to the latest numbers released by the China Passenger Car Association (CPCA).

Although total domestic PV sales in the first six months reached 9.09 million, up 11.4 percent, PV sales in June continued slide, down 2.8 percent compared to those of May, to a total of 1.47 million units. A major factor that contributed to the weaker demand in the first half of the year is the negative growth in China’s vehicle exports.

Total automobile sales including commercial vehicles were up 8.36 percent in the first six months, reaching 11.68 million units, according to China Association of Automobile Manufacturers (CAAM). The growth rate is 0.61 percentage point lower than the 8.97 percent for the first five months.

June automobile sales were 1.85 million, down 3.4 percent from those in May. June sales of passenger vehicles were 1.56 million, up 11.5 percent from the same month in 2013.

But the double-digit growth of passenger vehicles in output and sales in June was largely the result of efforts of many OEMs speeding up production to make the numbers look good for the first half of the year. They have been forcing inventory on dealers and are in preparation for the slower month of July when factory maintenance will most likely be scheduled and high-temperature furloughs may be arranged.

This explains why dealer inventory in June skyrocketed. According to the June Vehicle Inventory Alert (VIA) index released by the China Automobile Dealers’ Association (CADA), the number went up from 49.3 percent in May to close to 60 percent in June. CADA’s dealer inventory alert level is 50 percent.

There is little doubt that July sales will hit the lowest level after February numbers. And the prospects for August and September sales, normally steadily rising up, are not yet quite clear. “We are concerned about the performance of the entire automobile market in the second half of the year because of the pressure since February on dealers to take up inventory,” said Shen Jianjun, CADA’s secretary general.

After reporting on the June numbers, CPCA president Rao Da wrote about the importance of a new auto industry policy in building a globally competitive Chinese auto industry. China’s automobile sector, the veteran market analyst believes, is haunted by a series of problems such as energy shortage, PM2.5 pollution, urban congestion, lack of technology innovation, entry and investment restrictions, declining market share of local Chinese brands, relaxation of foreign equity share control, reform of state-owned auto companies, increasing monopoly in the sector, mergers and acquisitions, as well as emissions control, fuel efficiency and vehicle electrification. Rao believes that a new industry policy needs to be drafted by the government to help resolve the problems.

But given the ineffectiveness of the two former auto industry policies in 1994 and 2004, it is doubtful if a new policy would help fix the above-mentioned major problems.

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