Opinion: Supply, demand or command?

By John Bonnel (China Daily)
Updated: 2010-04-24 06:53

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Inventory rises

In addition, reports from dealers tell us that the situation at the retail level is different than wholesale numbers indicate. Visitor traffic is down and buyers are more demanding than in previous months. According to a national survey of 30 markets, transaction prices fell by 2 percent in March as buying incentives grew.

There are indications of rising inventories at both manufacturers and retailers. According to the China Automotive Association of Manufacturers, inventory for vehicle manufacturers reached the 500,000-unit mark in March, up approximately 50,000 units from February.

Average dealer stock is estimated to have increased to 75 days. While these numbers are not alarming, they do support the notion that the hyper growth rate is slowing.

Our forecast is not a pessimistic forecast for China's automotive industry. Indeed, in the recently published China Automotive 2015 -The Cost of Opportunity, we argue that the transportation needs for China's emerging middle class will only grow.

Automaker resolve to succeed in China will be tested, but the market will continue to develop as the largest and arguably most important in the world.

Instead, our view of China in 2010 reflects our judgment that stimulus efforts overshot their targets and that light vehicle demand will pull back toward a trend line, as imaginary as that trend line might be.

We expect passenger vehicle sales to return to the rates realized prior to September 2009 - 700,000 to 750,000 per month - and for light commercial vehicles to average 300,000 units per month for the balance of the year.

This may be tricky. Many analysts believe that once China reaches a new plateau, it cannot retreat. They argue that the social consequences would be too severe, so policymakers would turn to new stimulus measures to maintain the higher output levels.

Our 2010 outlook also reflects a belief that - while the track record of policymakers is most impressive - the boundaries of a market economy cannot be ignored. Policymakers face tradeoffs when adopting policies, and the tradeoffs for continued stimulus are now less appealing.

As we make projections on the future of China's automotive market, it is vitally important to come to terms with both the notion that a command economy can be effective and the notion that China is not above the constraints of a market-based economy. Look for China's automotive market to continue to grow, but at a less vigorous pace.

The author is a senior analyst at JD Power Asia Pacific