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Auto rebound?

By Jin Jing | May 22, 2009, Friday | Print Edition

CHINESE government incentives on compacts and fuel-efficient vehicles helped underpin record vehicle sales in April, but the boom doesn't necessarily mean profit growth and analysts are leery of predicting that the worst is over for the industry.

China vehicle sales last month jumped 25 percent from a year earlier to 1.15 million units, the China Association of Automobile Manufacturers reported. That compares with year-on-year gains of 5 percent in March and nearly 4 percent for the first quarter.

"Although the auto industry is showing signs of a rebound from its winter chill, it's too early to say we have definitely reached springtime," said Dong Yang, association deputy director.

The industry still faces a bumpy ride. Vehicle exports remain in a slump amid a global economic slowdown, and vehicles not covered by government incentives °?- including pricier cars and commercial vehicles - continued to suffer weak demand.

Car makers' profits remained low as consumers mainly pursued vehicles that had lower profit margins. Government incentives announced in January are available only to buyers of small cars and to farmers who trade in old clunkers for more fuel-efficient vehicles.

SAIC Motor Corp and FAW Co Ltd, two of China's biggest car makers, reported sharp declines in first-quarter earnings, while commercial light-vehicle manufacturer Dongfeng Motor said profit in the first three months tumbled 98 percent.

"Most of the sizzling car sales come from compact cars and minivans because of the government incentives, but those models are usually less profitable," said Zhang Xin, an analyst from Guotai Jun'an Securities Co Ltd.

"The mid-to-high price segment, which has higher margins, continues to see flagging sales that hurt overall performance," he said.

Still, in a global auto industry beset by diving sales, steep losses, layoffs, production cutbacks and bankruptcies, China's domestic sales provide a cushion for optimism.

Car sales in the United States plunged 34.4 percent in April, while Japan's car industry suffered a 23 percent drop despite government incentives to revive demand.

China's market is showing "a huge contrast with the end of last year when showroom visits fizzled," said a General Motors dealer in Shanghai surnamed Huang.

"Now our showroom is often filled with people, and some auto buyers are so keen they are willing to pay extra for early delivery," he said. "We have nearly sold out our 1.6-liter Buick Excelles, with more orders still coming in."

Passenger car sales in China last month jumped 37 percent to 831,000 units, driven by a 56 percent increase in sales of cars with engine capacities of 1.6 liters or less.

"The government incentives have borne fruit, and the overall situation is much better than our earlier expectations," said Xu Changming, director of the Information Resource Department at the State Information Center.

"In addition, consumers are showing renewed confidence, with less inclination to hold onto their money and take a wait-and-see attitude."

Consumer sentiment has also been boosted by the drop in fuel prices in the last six months.

Industry optimists are buoyed by what they see as a slow but steady recovery in the market.

Caution on profit prospects

China's vehicle sales rose in each of the first four months of this year after they declined for the first time in three years last August.

The auto manufacturers' association has lifted its full-year growth forecast for vehicle sales to 8.7 percent, or 10.2 million units. That exceeds its earlier growth forecast of 5 percent.

Still, the association remains cautious about profit prospects.

Revenue at 19 core auto groups, which generate 50 percent of the industry's revenue, fell 14 percent to 268.6 billion yuan (US$39.3 billion) in the first quarter, while profit slid 48 percent to 10.8 billion yuan.

Li Chunbo, an analyst at Citic Securities, said first-quarter results for listed car makers sank from a year earlier but were improved compared with the fourth quarter of 2008.

"The worst may be over," said Li. "Second-quarter results are expected to show considerable improvement, and the mid-term outlook is likely to outpace market expectations."

A solid recovery will depend on a rebound in exports and sales of commercial and high-end vehicles, analysts said.

Commercial vehicle sales in April edged up 1.4 percent to 322,100 units, but sales in the four months ended April 30 fell 3.9 percent, hurt by low demand for trucks.

The government's 4 trillion yuan economic stimulus package, which is heavy on infrastructure spending, is expected to eventually trickle down and give a boost to commercial vehicle sales.

Exports of both completed cars and car components in the first three months of this year slid 34 percent to US$6.4 billion. Exports for completed vehicles plunged 61 percent.

The drop in exports has been blamed on recessions in key markets and higher production costs.

Higher overseas thresholds for safety and emission standards also complicated market conditions for low-priced Chinese vehicles.

"There is a growing need for the Chinese government to launch incentive programs for commercial vehicles and exports," said Dong from the manufacturers' association.

Still, the industry shouldn't rely entirely on incentives because their effects tend to fade with time, according to Rao Da, secretary-general of the China Passenger Car Association.

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