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Auto firms headed for tougher times
By Zheng Lifei (China Daily)
Updated: 2009-05-06 08:11

 Auto firms headed for tougher times

Customers peek into a Skoda car at an automobile market in Nanjing, Jiangsu province. [CFP]

Escalating competition and the specter of deflation are threatening to cut deeply into the profit margins of Chinese automakers, particularly those that specialize in small cars that retail at low prices.

Total industry sales this year is widely expected to exceed that of the year before, thanks to the government stimulus program. Sales are also being driven by the need to quickly offload cars rolling out of production lines that were vastly expanded in previous boom years.

However, for those automakers that expect sales to fall this year, deep financial troubles are in the offing, analysts warned.

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China, which overtook the US as the world's biggest auto market in January, saw its vehicle sales grow 3.88 percent in the first quarter to 2.68 million units, as the government's stimulus policy for the automobile sector took effect. This is in stark contrast with other major global auto markets such as the US, which suffered a 38 percent slump in vehicle sales.

Automobile sales soared 34 percent from a month earlier in March, hitting 1.1 million units. In terms of year-on-year growth, it registered a 5 percent growth, according to industry group, China Association of Automobile Manufacturers (CAAM).

"The vehicle output and sales number in March were much beyond our expectations," said Zhang Xin, an auto industry analyst with Guotai Jun'an Securities.

But behind such a rosy scenario, the overall industry profit was falling as the profit margins of small car models, which was the chief contributor to robust vehicle sales in March, have been under the squeeze, analysts and industry players said.

Sales of passenger cars, which include sedans and minivans, rose 10 percent in March, of which sales of cars with engine sizes smaller than 1.6 liters jumped 22 percent from a year earlier, boosted by strong sales in rural areas.

The government in January halved the purchase tax on cars with engine sizes below 1.6 liters in a bid to boost auto consumption.

The central government had also set aside a 5-billion-yuan fund to subsidize rural buyers of minivans and light trucks, a policy that has been in effect since February.

"Small vehicles' profit margins are narrow," Xu Liuping, CEO of Changan Automobile (Group) Ltd, told reporters on the sidelines of the Shanghai Auto Show last month.

Although overall vehicle sales may rise this year, industry-wide revenue and profit are likely to fall, the CEO of the country's fourth biggest automaker, said.

Chongqing Changan Automobile Co, Changan Auto's listed arm, posted an 89 percent drop in its first quarter net profit even as the country's major minivan maker's sales revenue jumped 22 percent.

According to CAAM, the combined profits at the country's top 19 automakers, which include SAIC, and FAW, plunged 59 percent in the first two months.

SAIC Motor, the biggest carmaker in China, saw its net profit in the first quarter tumble 49 percent while its vehicle sales grew 6 percent from a year earlier during the same period.

"The automakers' slumping profitability shown in the first quarter indicates that many of them were used to relying on making profits on some larger, medium-or-high-end vehicle models," said Li Shengmao, an analyst with China Investment Consulting.

"When sales of such models dropped, which was the case in the first quarter, their overall profit tumbled," Li said.

The market share of the minivans and cars with engines smaller than 1.6 liters has reached 70.72 percent in the first three months, up 8 percentage points from the same period last year, according to CAAM.

"As the sales of minivans and smaller passenger cars increased in the overall auto market, their prices are likely to go down. But their profitability will not increase along with sales revenue," Guotai Jun'an's analyst Zhang Xin wrote in a note. The sharp price cuts initiated by carmakers in January to promote sales, analysts said, also contributed to their slumping profit margins in the first quarter.

But the intensifying industry competition will put pressure on auto prices in future.

"This year, the automobile industry will find itself in a situation where its sales may grow but profit will not," Huatai Securities said in a recent research note.

"Automakers who do not manage to increase their sales this year may be plunged into deep financial trouble," Guotai Jun'an's Zhang said in the note.

The falling prices of raw material in recent months, analysts said, may lift automakers' profit margin a little but warned that costs may go up again if the economy picks up pace.

Encouraged by the robust sales in the first quarter, especially in March, CAAM has raised its forecast for vehicles sales growth from the previous 5 percent to 8.7 percent this year, or 10.2 million units.

The country sold 9.38 million vehicles last year, up 6.7 percent from a year earlier, the first single-digit growth rate in a decade as the global economic downturn curbed consumer demand.

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