SHANGHAI - China's car market continued to lose steam in July as sales rose by only 1.1 percent compared with July 2003. Automakers sold 163,252 units in July.
The sales rate has been slowing for five months, but even in May sales rose almost 20 percent above the May 2003 level, according to the China Passenger Car Market Association, a trade group.
Sales growth topped off at a 69 percent year-over-year rate in February, excluding a January slowdown that reflected a weeklong holiday during which many dealerships were closed.
Foreign automakers claim to be unperturbed by the abrupt slowdown. Indeed, foreign automakers' sales showed decent growth in July. Poor sales by marginal local players dragged down the overall figure.
Industry watchers say the sales slowdown could pinch the cash flow of suppliers because China's domestic automakers, typically slow to pay for parts, could delay even more when auto sales are weak.
But Ford is charging ahead. It is building a second plant in China with annual capacity of 200,000 units. And it will quadruple annual capacity at its plant in Chongqing.
"We have had a more conservative approach in forecasting market volume," says Kenneth Hsu, a spokesman for Ford Motor (China) Ltd. "Ford's expansion plans have taken into consideration the different growth scenarios. As for the 200,000-unit expansion, we have flexibility to either do that or run at a lower rate if the market demands changes."
General Motors said in June that it will invest more than $3 billion in China over the next three years. Shanghai GM sold 19,660 units in July, up 20.3 percent from July 2003.
Weak domestic players are responsible for the small overall growth numbers. For example, sales of the Zhonghua sedan, made by BMW partner Brilliance China Automotive Holdings, fell by 64.0 percent in July compared with the same month of last year. Sales of FAW-Tianjin Auto's budget-priced Xiali subcompact fell 43.5 percent from the July 2003 figure.
In 2003, 2 million passenger cars were sold in China, up 70 percent from 2002.
"Most people still believe over the long run China is still going to be a very attractive market, and the short-term correction might be good for the industry because it could drive some weak players out of the market," says Paul Gao, a principal at consulting firm McKinsey & Co.
It also could mean hard times for some suppliers. They could face a slew of late payments with such sluggish sales growth, which comes at a time of shrinking margins caused by a price war.
"The typical Chinese companies sometimes have payment behavior that is not according to international standards," an executive at a large European supplier says diplomatically.
Says Gao: "Given the slower demand and price war, suppliers to weak local OEMs should be very careful."
Suppliers also are worried about growing auto inventories.
Those inventories are growing because production didn't slow down as quickly as sales in the first half of the year, says Ashvin Chotai, director of Asian automotive industry research at Global Insight, a London consulting firm.
"A lot of the local companies have a supply (of cars) sitting in some small towns. There is a huge inventory right now," says Daniel Collins, sales manager for dynamics and propulsion systems at Delphi China. "If I didn't see sales pick up before the end of the year, I'd start to worry."