Suddenly, China’s Car Market Falls Apart

One reason investors like to own General Motors (NYSE: GM) stock is that that company is the leading car manufacturer in China, when its local partners’ sales results are added to its own. Chinese sales are a primary reason investors like Volkswagen. And investors carefully watch whether Ford (NYSE: F) and Toyota (NYSE: TM) can challenge the market share of the two incumbents.

The trouble with relying on China as the future of the global car industry is that the people in the People’s Republic have lost some of their voracious appetite for new vehicles. The China Association of Automobile Manufacturers reports that, in January, sales of cars and light vehicles dropped 23.8% year-over-year. Analysts blamed the lunar holiday. But sales rose only 5% in all of 2011. So, the market has softened considerably.

China may produce sales of 18 million vehicles per year, well above the 13 million or so in the U.S. But car companies realize that American car sales are rising rapidly, while Chinese sales are not. The U.S., just two years ago the black hole of car sales, has become a foundation for revenue of multinational manufacturers. China has become a market where large investments in factories and marketing is a problem, at least for awhile.

Another challenge for foreign car companies in China is that local companies have grown tired of watching manufactures from the U.S., Japan and Europe exploit their market. All of the large local firms have learned manufacturing from their joint venture partners like GM and VW. That gives them the ability to stand on their own, and that can only hurt the sales of outsiders.

China has lost some of its luster for foreign car companies — that is, sales there have faltered — for a a number of reasons. Among them is that China’s middle class faces the effects of an economic slowdown and an inflation rate that hit 4.5% last month. And many Chinese cars are still relatively new. The factor of the replacement of cars that are six years or older, which is the cause for much of the improvement in sales in the U.S., is not as large a factor in China. There, the really huge volume in annual sales only happened in the past several years. The Chinese may not be ready to trade their cars in yet.

China, once the biggest hope for sales by global car companies, cannot sustain the revenue increases that the industry hoped it would.

Douglas A. McIntyre