China's Auto Market Rebounds, but It's Still Deep in the Woods

It is quite possible that China will overtake the United States this year to become the world's largest automobile market. In the first quarter, China succeeded the US as the “champ” with sales of 400,000 more vehicles than the new Number 2. This news is not as happy as everybody would like.
 
China Association of Automobile Manufacturers (CAAM) data, released April 9th, show first quarter domestic car sales reaching 2.6788 million units, up 3.88% over the same period last year, a rebound that looks to be primarily due to the recent market stimulation policies. Since December last year, the government has adjusted fuel consumption taxes, exempted road maintenance fees, and reduced purchasing fees for vehicles with displacement below 1.6L, all to encourage the purchase of new cars.
 
Another promoting factor is that March is the traditional peak season for car buying, and distributors purchased more cars at the end of the quarter to get high bonuses, though pessimistic predictions in December and January meant some car models are out of stock because production lines were stopped and workers furloughed, and assembly factories only began to return to normal production in March.
 
Still, as Zhu Yiping, assistant secretary-general of CAAM, said, “This year' s domestic first quarter car sales haven’t reached a high year-on-year growth, as it is not easy to have positive growth in both production and marketing after the negative growth of the last three or four quarters.”
 
The government stated in its "Automobile Industry Adjustment and Stimulus Plan" that the target of "production and sales of motor vehicles in 2009 is over 10 million, with three-year average growth rate reaching 10%." If the sales trend of the first quarter can be maintained, it should not prove too difficult to reach the goal.
 
The improving figures are encouraging but do not reveal the whole picture. China's auto industry still faces three other serious problems: an uneven spread of models, decreasing profits even with improved production, and a fall in exports. Whether the industry is really rebounding is yet to be seen.
 
The commercial vehicle market is still hovering near bottom. In the first quarter, though truck sales experienced an 11.22% increase, year-on-year, sales of passenger cars, semi-trailer tractors, incomplete passenger cars, and incomplete trucks continued to decline.
 
Overall, the economic outlooks for the automotive industry as a whole are not optimistic. According to CAAM, January and February's main business income for carmakers was 320.413 billion yuan, down 9.42%, while profit amounted to 9.879 billion yuan, down 50%.
 
While the domestic market has rebounded a bit, the international situation still looks grim. First quarter auto exports faced serious challenge. CAAM says the number of vehicles exported was 61,000, 62.06% below first quarter 2008, with the top five exporters showing substantial declines.
 
China's car firms are eyeing assets of overseas carmakers. It is reported that China's Geely Automobile Holdings is likely to partner a bid with another Chinese company for Ford's Volvo, a Swedish maker of passenger cars. And another Chinese consortium wants to acquire part of the assets of Delphi, an US auto parts maker.
 
Acquisitions of this sort pose difficulties of their own. In addition to the problem of supplying medical coverage and other welfare contracted to employees of these enterprises, whether the Chinese firms have the management capability necessary to successfully run overseas companies is in doubt. China's Shanghai Automotive Group (SAIC) acquired South Korea's Ssangyong Motor a few years ago, but now Ssangyong Motor is up for bankruptcy protection, and SAIC is being forced to give up control.

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