Is The China Auto Boom Headed For A Bust?

When China overtook the U.S. in 2009 as the world’s leading car market, pundits considered it yet another sign of the growing might of the world’s most populous nation.  The Washington Post even noted that China was becoming an auto “epicenter.” Little did they realize that Chinese car market was headed for a fall.

According to a report released today by  KPMG may dash hopes that robust growth in the Chinese market will be able to off-set lackluster demand in the U.S. and Europe which has not yet recovered to pre-Recession levels.   Executives surveyed by the firm argue that vehicle demand in China, like everything else, is finite.

“Over  a quarter of executives expect China to be overbuilt by 2015,” the report says, adding that given the rapidly developments in the car market “accurate forecasts are hard to make.”

There are already signs of froth in the market.  Chinese auto production soared 39.4% year-over-year between January and  July of 2010.   Auto sales, however, rose 28.6% during that same time.   It’s unclear where this surplus production went.   Nonetheless, the strength of is  auto industry is impressive.

“Over the past five years, China was the only country in the world to achieve annual growth of more than 20%, and in 2010 alone, car sales will likely grow by 23%,” Nielsen says. ” The big story, however, is not the size of that growth—sales of cars will consistently increase for the next few years—but where that growth is coming from: China’s lower tier cities. ”

In the coming years, the Chinese market is VW’s to lose.  The German automaker had a 13% market share during 2009, according to KPMG.   Respondents are split about GM’s prospects with 40% expecting the dominant U.S. car company to see its share rise and 36% predicting it will go down.    There was no hesitation on their views about  Chrysler, which they expect will suffer the greatest decline of any car company in market share.

The auto industry highlights China’s great economic strength and the perils it may face from an economy that may overheat.

–Jonathan Berr