4.23.2012

Traffic Jam in China's Auto Market

The Wall Street Journal, April 23, 2012



CHINAHERD

With so many car makers accelerating into China, the risk of a pile-up is growing.
The Beijing auto show, which opens its doors on Monday, has become the biggest extravaganza in the biggest car market in the world. Victoria Beckham—the artist formerly known as Posh Spice—is in town to promote the Range Rover Evoque. Maserati is showcasing a SUV.
China's massive population, rising wealth, and growing demand for autos make the excitement easy to understand. From 2008 to 2011, unit sales increased 98%. Analysts speak breathlessly about demand's taking off when gross domestic product hits $10,000 per capita, measured in purchasing-power-parity terms. China is projected to cross that threshold in 2013.
But amid the sound of auto makers revving their engines in unison, there are reasons for caution.
Excess capacity is a risk. Bill Russo, an expert in China's auto sector at Synergistics, estimates that production capacity in China in 2015 could be as high as 28 million units. With sales at 18.5 million in 2011, producers are betting on a lot of demand growth.
On the recent evidence, they might be riding for a fall. Unit sales rose just 2.5% in 2011. The excuse then was that the end of tax incentives to buy cars had dented sales. But the bad news has continued in the first quarter of 2012, with sales down 3.9% from a year earlier.
Competition at the luxury end of the market, where margins are highest, is especially intense. The Maserati SUV, slated for production in 2014, will jostle for position with offerings from Porsche, BMW BMW.XE -4.34% and Mercedes DAI.XE -4.22% . Ford is planning to bring new SUV models to the China market. In the budget-passenger segment, margins are lower, and domestic players are also grasping for market share.
Auto makers can't pass up the opportunity to get into the China fast lane, and there will be some winners. Audi grew its greater China sales 37% in 2011. But the road to higher profits is looking a little jammed.

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