SHANGHAI - Toyota's main partner in China posted a 79 percent slump in second-quarter earnings on Tuesday, hit by credit curbs, but analysts said the second half should be better if Beijing eases up on the economic brakes.
Tianjin FAW Xiali Automobile Ltd., which makes Toyota Motor Corp.'s Vios and Corolla sedans, said gross profit in the first nine months would slide by more than half, a sign of how the fallout from efforts to rein in growth may spill into the third quarter.
Xiali, China's number-three carmaker by market value, also makes its own branded sedan and the red taxis that ply the capital's streets.
Toyota, the world's second-biggest automaker, is a relative latecomer to China's fast-growing auto market where Volkswagen, General Motors and Honda Motor Co. Ltd. have been making cars for years.
Xiali's parent First Automotive Works, China's largest vehicle maker, had agreed with Toyota to make as many as 400,000 of the Japanese firm's cars by 2010. In the agreement, Xiali would serve as a production base for both partners.
But China's car market growth is expected to slow to 10 percent to 20 percent this year after nearly doubling to 2 million units in 2003, as Beijing clamps down on credit to parts of the economy in danger of overheating on the back of alarmingly high investment.
Car sales rose just 1.6 percent in July from June after three months of decline.
"Sales are going to pick up in the second half as economic tightening steps are eased, but that's not going to happen before the end of September," said Xu Xiang at China Southern Securities, who expects Xiali's full-year net to drop 25 percent.
Despite a 22 percent rise in turnover to 1.59 billion yuan in the three months to end-June, Xiali's net profit fell to 61.7 million yuan ($7.46 million) from 296.81 million yuan a year earlier, based on Reuters calculations.
Now Xiali is grappling with a double-whammy of a nationwide price war and rising costs for raw materials such as steel.
It had less than 1 percent of the market in 2003, against a more than one-third share for leader Volkswagen AG.
"The main reasons for the (Q2) profit fall were fierce market competition, rising raw material prices and the appreciation of the Japanese yen," Xiali said in a report published on the Shenzhen stock exchange's Web site (www.cninfo.com.cn).
A reduction of its stake in the Toyota venture to 33.12 percent from 50 percent also slashed earnings, it said.
PRICE WAR RAGES
Slowing car sales have prompted rampant price-cutting in China, where multinationals are pumping in $13 billion to boost production to about 6 million cars a year by the end of the decade -- sparking fears of a glut.
China's 10 largest carmakers were left with 63,501 unsold units at end of July, the Xinhua news agency cited official figures as showing, against 47,300 for the whole of last year.
Xiali itself sold 59,302 cars in the first half year, up 6.11 percent, but output rose 6.63 percent to 68,865 units, it said.
A Xiali executive warned on Tuesday that widespread discounting was reaching its limit.
The boxy Xiali already is one of the cheapest models on the market, costing slightly more than 30,000 yuan.
"Prices have already come down so far, I'm not sure there's much room for further cuts," a company spokesman said by telephone.
"But we're optimistic the third quarter will be better as sales pick up and we're able to improve cost controls."
First-half net profit also fell 79 percent, to 74.88 million yuan, on turnover up 16.3 percent to 3.1 billion yuan.