Another Block to China’s Car Sales

As auto manufacturers like General Motors (NYSE: GM) and Ford (NYSE: F) anticipate worse losses in the Europe market, their managements and investors continue to look to the crowded China market for relief. It has become the largest market in the world, with as many as 18 million cars and light trucks sold there in the past year. But unit sales growth has flattened. And there is a new reason the market will be much less promising than forecast — the People’s Republic has begun to cap light vehicle sales in large cities.

The Xinhua News Agency reported that sales of small-sized and mid-sized passenger cars will be restricted in the nation’s third largest city, Guangzhou. The upper limit of sales has been put at 10,000 a month from this month through July 2013.

According to MarketWatch:

Guangzhou, which has a population of more than 16 million people, has 2.41 million cars, of which 1.67 million are small- or medium-sized vehicles, with the average annual growth rate for sales of these cars at 19% over the past five years.

The reason for the decision is not entirely clear, but it is likely to be one of two. First, the road infrastructure of the city has been overwhelmed by cars and light trucks. Also, air pollution has become so bad that for some residents it is lethal.

The infrastructure argument’s weakness stems from the ongoing explosion of road building in China. The pollution explanation is much more probable. Annual air pollution deaths in the nation are routinely put into the hundreds of thousands, and that number worsens as industrial production and car sales combine with the use of wood and oil for cooking and residential heat.

The victims of the car sales limits, which will spread if pollution is the trigger, will be foreign car companies. Most local companies are at least partially state-owned. Most foreign car companies are publicly traded and have invested billions of dollars in plants and distribution networks. If China is the best promise for an ongoing rebound in the global auto industry’s fortunes, that hope has largely vanished.

Douglas A. McIntyre