Car Companies Face Dying Growth In Chinese Market

The market value of General Motors (NYSE: GM) and Volkswagen, two of the largest car companies in the world, rely a great deal on their dominant positions in the Chinese market. That market now represents 18 million sales of cars and light trucks a year. This is well ahead of the number two market, the U.S., where annual sales are closer to 13 million. Now, the Chinese market has begun to contract, however. That single country, which was the hope for improved revenue for manufacturers around the world, has become much less attractive.

The China Association of Automobile Manufacturers reported that deliveries of cars and light trucks fell 4.4% in the first two months of this year. That took sales down to 2.37 million. Analysts looked at the data and many saw it as a sign that the market for cars has cooled enough that the balance of 2012 will be just as bad.

The data comes as the car company also-rans in China have started to build manufacturing facilities in the country. Some of these companies, which have small shares in China, are among the largest manufacturers in the world. They include Nissan, Toyota (NYSE: TM), Ford (NYSE: F) and Honda (NYSE: HMC), as well as luxury car companies based in Europe.

One of the problems that have dragged on multinational car company profits this year is that the EU car market is shrinking. That has triggered excess factory capacity and operations that have way too many workers. The companies, local governments and unions members have collided over what will happen as the EU economy continues to worsen.

But overcapacity in China could become nearly as severe a problem as it has in Europe. The difference is that multinational manufacturers are investing in new plants in China today, while they are trying to deal with old plants in Europe. It is hard to say which is worse. The big auto companies are fighting a two-front war.

Douglas A. McIntyre