Good times set to roll on for car market

China never ceases to amaze.

In 2006, the country surpassed the $1 trillion mark in foreign reserves, received more than $70 billion in foreign direct investment, and exported more than $177 billion worth of goods than it imported.

Despite what sounds like good economic news, policymakers have been working and continue to work feverishly at slowing the pace of growth in China.

The fear is that China's economic progress is unsustainable at best, and could cause a nationwide collapse at worst.

Within this environment, the Chinese automotive industry was rolling in 2006. Light vehicle demand jumped 25 percent to 6.6 million units, including a 35 percent jump in passenger vehicles.

By year's end, China was the second-largest vehicle market in the world and the third-largest vehicle producing country in the world.

Heady stuff, but perhaps time for a pullback in 2007?

Perhaps not.

January's passenger vehicle sales hit 446,000 units, up 36 percent from January 2006. The January total marks the second highest monthly demand on record behind only the December total of 471,000 units. China's automotive demand keeps rolling.

The market in February was also strong, though volumes were down from January due to the week-long Spring Festival holiday.

Combined, China's passenger vehicle market through the first two months of the year grew 30 percent, with sales reaching 782,000 units.

The mid-sized passenger car, luxury passenger car, and small multi-purpose vehicle (MPV) segments were the key drivers of growth in January and February, each up over 50 percent year-on-year.

The remaining segments each recorded double-digit growth except micro cars. Though the cheapest vehicles in the market, Chinese buyers are increasingly choosing size over price, as the segment grew just 1 percent in the first two months.

The January and February numbers come as something of a surprise. The pace is well ahead of the JD Power Automotive Resources Asia Ltd forecast for China's passenger vehicle market in 2007, which projects 16 percent growth in passenger vehicle demand to 5 million units.

We are, for now, sticking with our numbers. While we recognize the government has so far been ineffective in quieting demand, we believe measures taken should soon begin to slow the torrid pace of growth in China, and should reduce the growth rate in passenger vehicles.

Looking ahead to the full year 2007, three segments are expected to grow faster than the market average and gain market share. Consistent with the strong segments in January, we see the mid-sized passenger car, luxury passenger car and small MPV segments leading 2007 growth.

In the mid-sized segment, China's third-largest passenger vehicle segment, the key driving force is the Toyota Camry.

Produced at Guangzhou Toyota, the Japanese carmaker's venture in the southern city of Guangzhou, the Camry has sold extremely well since its release in mid-2006. Camry sales in the first two months alone were 24,100 units. This compares to sales of 20,200 units for the Accord, and 20,100 units for the Passat.

Driving growth, the mid-sized segment will welcome seven new models this year.

The Roewe 750 from SAIC Motor Corp, which is the born again Rover 75, the next generation Volkswagen Passat, named the Magotan, the new Ford Mondeo and the Chrysler Sebring are among the vehicles to look for in this segment.

New models

The new models, along with the strength of the Camry, are expected to boost the segment by 26 percent over 2006, or 200,000 units. The mid-sized cars?share of the market will increase to around 19 percent, a growth of 1.6 percent, the highest of any segment this year.

Localization of luxury vehicles will boost the luxury passenger car segment.

Lower import duties on luxury vehicles will lower market prices and raise demand for luxury models. The luxury segment is expected to grow to just over 4 percent of the market in 2007.

The small MPV segment has recorded an average annual growth rate of 65 percent since 2002, though its volumes remain very small.

The segment represents only a 1 percent share of the market, and new models this year are expected to spur the segment's growth, and consequently its share.

There are currently just eight small MPVs in the market, but this will increase to 14 by the end of the year.

Chery, Ford and Suzuki are among the brands launching models into the segment this year, and should contribute to the expected 81 percent growth.

This growth equates to a half a percentage point increase in share.

The main passenger vehicle segment, the compact segment, will receive only three new models this year: the Skoda Laura, the new Toyota Corolla and the Citroen C4 Picasso.

Growth in the segment is expected to be slightly below the market average at 13 percent. A quiet 2007 in the compact segment will precede a big year in 2008, when seven new models will show up in the China market.

As for the automakers in 2007, Toyota, Chrysler and Mitsubishi are three key manufacturers to watch.

DaimlerChrysler is looking to establish the Chrysler brand in China, though these plans may face new hurdles as discussions begin on the unwinding of the German-American marriage.

The 300C was released at the end of 2006 and volumes are expected to reach almost 20,000 units this year. Chrysler will also be releasing the Town & Country MPV in March and then the Sebring mid-sized car in June.

Two of the new models will be in two of the hottest segments of the year. All together we expect Chrysler to achieve volumes of just over 30,000 units this year.

Mitsubishi will finally assert itself in the market, having been rather tentative in China until now.

While once content to license its technology to Chinese companies like Soueast Motor, who sold the products under their own brand name, Mitsubishi is now beginning to push its own brand forward. The Mitsubishi Lancer and Galant were released during 2006.

Sales of Mitsubishi brand vehicles are expected to pick up pace through 2007 and climb to just over 50,000 units, with the Lancer accounting for about 60 percent of that.

Toyota's momentum will carry them in 2007.

Though no new models are expected from Toyota, we expect the brand to grow 30 percent in 2007 to a share of 7.5 percent.

The Camry will be the primary driving force behind this growth with volumes expected to exceed 140,000 units, about twice that of its second best selling model, the Corolla.

So China continues to amaze, and the January automotive sales data does not fail to do its part. Still, we should be aware that the government's intention is to slow things down, and the government usually gets what it wants.

So while we look for the mid-sized passenger car, luxury passenger car and small MPV segments to lead the growth in 2007, we look for the growth rate to slow. And if we are right, well that would be amazing.

The author is a researcher at Automotive Resources Asia Ltd

(Shanghai Start 04/21/2007 page1)