Car makers gear up for a tougher China market

BEIJING - China's massive car market may still be young, but the auto industry CEOs descending on Beijing this week will see first hand that it's also growing up fast, according to a Reuters report.

The Beijing auto show starts on Monday at a time when China's auto market has begun softening after a decade of breakneck growth. The days when car sales could surge 46 percent in one year - as they did in 2009 - are gone, say many industry executives and analysts. Most see growth falling off to an average of 7-8 percent this decade.

Unfortunately for car makers, slower growth comes just as new entrants appear in the market and existing competitors add to their offerings.

"There are more brands and more products in China than ever before, and that's making market conditions suddenly more competitive and tough for everyone," said Li Shufu, chairman of Zhejiang Geely Holding Group Co and Sweden's Volvo, which Geely acquired in 2010.

To be sure, there is plenty of growth left. Even conservative forecasts have China's auto market surging to 30 million vehicles a year by 2020, from last year's 18 million. Some think volume could even reach 40 million.

But the signs of a tougher market are clear.

Local Chinese auto makers like Chongqing Changan Automobile Co and BYD Co have seen their once-robust profitability erode significantly, thanks to the government's decision to scrap most of the auto purchase incentives it offered in the wake of the global economic crisis in 2008.

And some global auto makers, notably a Toyota Motor Corp. and Honda Motor Co, also have struggled to sustain high growth.

Harder to sell

Many CEOs come to Beijing on the "continued promise of China" as a market place, Seiji Kuraishi, head of Honda's China operations, told a small group of reporters in Beijing earlier this month.

"For the most part, including us, top global officials are coming here in hordes because China has become the world's No. 1 market and its appetite for autos is still growing," Kuraishi said.

Still, as China's market matures, there's no doubt it will get harder to sell cars.

In some cases the market now calls for discounts and other sales incentives, including by once high-flying luxury brands like Daimler AG's Mercedes-Benz brand, which discounted certain trims of the S-class sedan for a period earlier this year.

The slowdown is poised to make competition even more cutthroat, as new entrants from abroad, including Seat and Alfa Romeo, pile in, while foreign joint ventures add more China-only brands as part of a condition of being allowed to produce here.

"There is a lot of competition in China today; there is a lot of price pressure in China today," Tim Lee, head of GM's global operations based in Shanghai, said in Beijing Sunday, referring to sales discounts that eat into profit.

Surviving means understanding China's increasingly sophisticated consumers.

"The market's certainly becoming more varied in market requirements - there is growing (vehicle) personalization, growing SUVs and growing luxury whereas previously it was more a more basic form of transportation most people perceived China to be," said Kevin Wale, head of General Motors' China operations.

"Every trend that has been in the auto world is starting to come to China, and (auto executives) need to show up and see what's happening."