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