SHANGHAI/HONG KONG -- The wheels are falling off the China auto growth story.
Overcapacity, falling prices and Beijing's clampdown on credit as it cools a scorching economy are conspiring to erode profits and share prices at Chinese automakers.
On Tuesday, U.S. carmaker Ford's main Chinese partner, Changan Auto, posted a 7.3 percent fall in second-quarter earnings as car sales skidded.
Analysts said its full-year profit may only rise 10 percent -- less than a previously predicted 20 percent -- as a price war begins to bite in a decelerating market.
In June, the number of cars sold in China fell for the third month in a row, growing slightly on the year. State media are speculating that for the first time, sales fell in July on a year-on-year basis.
"The price wars are set to rage for at least the next two to three years. Nobody is going to be immune," said Lin Wenjun, auto analyst at Capital International Holdings in Shanghai.
Many would-be buyers are waiting for prices to fall further.
In Hong Kong, shares in Brilliance China Automotive Holdings Ltd., the Chinese partner of Germany's BMW AG, continued to slide after analysts cut their profit forecasts and ratings on China's biggest minibus maker.
Since the start of the year, Brilliance stock has fallen by 60 percent, while Denway Motors Ltd., the joint venture partner of Japan's Honda Motor Co., is off 28 percent.
Among smaller vehicle makers, Great Wall Holdings Co. Ltd. is down 56 percent and Qingling Motors Co. Ltd. is off 35 percent.
J.P Morgan analyst Frank Li said higher sales won't be enough to offset margin contraction in the industry this year.
"The de-rating pressure on China's auto sector will not fade away in the next 12 months because China's auto market will face increasing oversupply in the next two years," he wrote in a note.
Christopher Lee of S&P Equity Research said he expects Brilliance, Qingling and Great Wall to report declining earnings this year, with only Denway, which makes popular Honda sedans and minivans, seeing a profit increase.
"Pricing, competition, raw material cost increases this year -- margins are definitely going to be hurt," said Lee.
Car sales in China are expected to grow by just 20 percent this year after nearly doubling in 2003 to two million units.
Slowing sales growth is pushing down prices as foreign car makers plan to invest some US$13 billion to triple capacity in China to 6 million units a year by the end of the decade.
The joint venture operations of foreign giants Volkswagan AG and General Motors are among the Chinese manufacturers that have cut prices this year.
J.P. Morgan said China's car sector woes are supply-driven.
It said sedan demand should grow by a solid 25 percent this year to 2.59 million over last year's bigger base, but predicted oversupply of 11 percent this year and 23 percent in 2005.
Changan on Tuesday said total first-half sales rose 27.5 percent to 248,810 vehicles, boosting turnover by 39.7 percent to 10.14 billion yuan. But revenue dropped 30 percent in the second quarter to 5.38 billion yuan due to a vicious price war.
Shares in Brilliance, which jointly makes luxury cars in China with BMW and also sells its home-grown Zhongua sedan, fell 5 percent on Tuesday after sliding 8.2 percent on Monday on media reports its chairman and other top executives had submitted resignation letters after selling down their stakes.
Brilliance said the directors have not resigned. However, five executives have sold shares dating back to 2003.
JP Morgan and Core Pacific-Yamaichi cut their ratings on Brilliance to "underweight" and "sell", respectively, and cut earnings forecasts for this year and next.
Wendy Huang of Core Pacific-Yamaichi said she expects first-half earnings at Brilliance fell by 15 percent.
Its minibus sales fell 12 percent to 31,500 units in the first half and its Zhonghua sedans plunged 46 percent to 8,404, Core Pacific said. It sold 4,883 BMWs in the same six-month period, representing only 27 percent of its full-year sales target of 18,000, the brokerage added.
Haitong Securities analyst Gu Qing expects Shanghai Automotive Co. Ltd., which owns 20 percent of GM's main Shanghai venture, to increase second-quarter net profit by about 5.7 percent to 690 million yuan (US$83.33 million) -- less than its 131 percent first-quarter surge to 710.67 million yuan.
"But it's simply by dint of its relationship with GM, whose sales are still doing well, that it will be able to avoid doing any worse," she said.
"The market is becoming saturated. We are just not going to return to the heady days of growth."