Predictions for the Chinese automobile market in Q2

Following a steep fall in the growth rate in the Chinese automobile market last year, several experts were looking forward to the industry's recovery in 2012. However, that recovery has yet to appear, with sales figures from the first quarter of the year being lackluster at best. According to statistics from the China Association of Automobile Manufacturers, a total of 4.79 million domestically made vehicles were sold in the first quarter, with 3.77 million of them being passenger vehicles. Both numbers represent year-on-year decreases of 3.4 percent and 1.25 percent, respectively. Commercial vehicle sales fell even further, decreasing a full 10.6 percent from the previous year. Although prospects for the first quarter were not especially high, not many predicted how poor the market would ultimately be.

A number of other factors have made it more difficult to accurately predict how the market will perform later this year. First, the government has reevaluated its target for GDP growth to 7.5 percent, the first time in over five years that the target rate has been set under eight percent. Secondly, the price of oil has already broken eight yuan ($1.2724) per liter. In addition to these, since traffic congestion remains a serious problem, policies aimed at restriction automobile purchases and increasing production costs for manufacturers look set to remain in place. There is also increasing pressure from the government to restructure the automobile industry. With all of these issues, it remains to be seen if earlier predictions of eight percent to ten percent growth in the market this year are realistic. Equally hard to predict is how the market will perform in the second quarter.

To gain further insight on this issue, Gasgoo.com (Chinese) conducted a survey earlier this month to collect predictions on the market in the second quarter. The week-long survey collected opinions from 2,014 industry analysts and experts. In addition to forecasts for the second quarter, the rising price of fuel, the market for luxury vehicles and the performance of own brand manufacturers were all issues touched upon.

The second quarter is traditionally a slow season for the automobile market in China. When asked about expected growth rates for sales in the quarter, the majority of participants, 53 percent, believe that it will be between zero and five percent. A further 29 percent predict that negative growth from before will continue into this quarter.

Due to the phasing out of policies aimed at stimulating economic growth, the common consensus was that growth in the automobile market return to a more realistic rate in 2011. In line with those expectations, growth rates fell sharply from over 30 percent in 2009 and 2010 to 2.5 percent. Several in the industry, including executives of many manufacturers, predicted that the market would recover again this year, with most predicted growth rates between eight percent and ten percent. These rates were based on general macroeconomic analyses that the national economy would recover this year. However, year-on-year GDP growth in the first quarter totaled only 8.1 percent, compared to 8.9 percent in the last quarter of 2011. The figure represents the lowest growth rate the country has seen in three years.

Furthermore, effects from the rising price of oil in the end of last quarter are expected to be more apparent this quarter. Coupled with uncertain influence from government policies, there are a lot of factors that hint at low or even negative growth this quarter.

There are still those who maintain optimistic predictions for the second quarter. 14 percent of respondents believe that the growth rate will be between five and ten percent, while another four percent believe that it will exceed ten percent. However, the widespread consensus is that the second quarter will be another tough one for the automobile industry in China.

On March 20, the National Development and Reform Commission announced that the price of gasoline and diesel fuel would be raised to 600 yuan ($95.43) per ton, the largest increase it has seen since June 2009. The per liter prices for 90 grade gasoline and zero grade diesel have increased .44 yuan ($.0699) and .51 yuan ($.0811), respectively. Several parts of the country are now selling fuel at eight yuan ($1.2724) per liter. Furthermore, several analysts believe that prices may rise further still. What does all of this mean for the automobile market? In the second question of the survey, participants were asked what degree of influence the eight yuan fuel price would have on the market. While 35 percent of participants answered that the higher price, as well as the increased production costs it brings, will have a seriously adverse effect on the market, the majority of participants, 55 percent, answered that the effect will not be overly severe. Meanwhile, eight percent believe that the influence will be negligible at best. The remaining two percent were undecided.

The ever increasing price of fuel has been a constant source of concern for prospective automobile buyers in China. Manufacturers have also been aware of this, and have introduced increasingly fuel efficient vehicles in response. Those who maintain that the costs will only have a marginal effect on sales believe that, although the eight yuan barrier has been broken, the fuel price is still within acceptable limits for most potential automobile buyers. They uphold that, as long as the economy remains stable and the average income level can be maintained, the demand for automobiles among first-time buyers will remain high. While rising fuel costs is one of the most important issues of concern for buyers of small cars, it is hard to gauge how they alone would affect the industry as a whole.

For the last three years, growth in demand for luxury vehicles has been far above the market average. China is among the world's top three largest luxury automobile markets worldwide. According to various sales statistics, China is now the largest market for Volvos, Audis and Rolls-Royces worldwide. The country is also the third largest market for BMW and Mercedes-Benz, as well as the second largest for Bentley, Porsche, Ferrari and Maserati.

Investments from multinational luxury vehicle manufacturers have increased dramatically in recent years. For example, last year BMW added 30 new dealerships to its nationwide sales network, expanding its coverage by 23 cities. The Munich manufacturer plans to add even more dealers this year. Audi, meanwhile, invested 400 million euros ($518.67m) to enlarge its sales network, with hopes that it will double in size within the next two years. Mercedes-Benz has also increased its investments in the country. The Stuttgart manufacturer aims to manufacture 300,000 vehicles in China by 2015. Mercedes-Benz plans to add 40 new dealerships to its sales network this year. Japanese luxury brands are also paying more attention to China. A total of 19,075 Infinitis were sold in the country in 2011, 60 percent more than the previous year. Infiniti has set a sales goal of 30,000 vehicles for this year. Although Lexus is usually very tight-lipped about its sales figures, several reports suggest that it too is preparing to embark on new sales and dealership expansion plans.

The third question of the survey asked participants if they believe that luxury vehicle manufacturers will be able to maintain strong growth into the second quarter of the year. The majority of respondents, 54 percent, agreed, saying that the demand for luxury products, which includes automobiles, will not diminish this quarter. 33 percent, however, believe that increasing inventories and th