Sales Decline A Fork in the Road to China

The growth in car sales in China has slowed after years of bumper increases. But with the Chinese middle class still booming, German automakers are confident the good times will keep rolling.
German cars are increasingly failing to find their way out of the showroom.

German automakers sell 40 percent of their cars in China, and have enjoyed bumper sales and double-digit growth there over the past few years. But they couldn't expect it to last, and now reality is hitting the Chinese market and sales are slowing, even for luxury cars.

The China Association of Automobile Manufacturers estimates sales in the premium sector is growing at only 7 to 8 percent – slower than the overall car market for the first time.

Experts at the global management-consulting firm McKinsey predict overall growth over the next ten years to “only be in the middle to high single-digit range.”

At the same time, higher wages and production costs are squeezing carmakers’ profits.

Still, Volkswagen and its Chinese partners, FAW and SAIC, plan to have 5 million cars rolling off assembly lines within five years, up from the current 3.5 million. The increased capacity will add 30,000 new jobs in China alone, and cost the Wolfsburg-based manufacturer about €22 billion ($24.6 billion).

Companies such as Audi and Volkswagen are confident that Chinese buying power will fuel more sales again in the future.

But such investments are not without risks. If demand should drop in China, Volkswagen, Daimler and BMW could be forced to cut several thousand jobs in Germany as well.

That’s because German auto companies have grown highly dependent on the Chinese market. With the exception of Mercedes, owned by Daimler, German carmakers now sell more cars in China than at home.

Sales could also be affected by Beijing’s government, which is under pressure to curb air pollution. Since automobile exhaust contributes 22 percent of the smog in the capital city, Beijing wants to limit the number of new car registrations to fewer than six million, by allocating them lottery-style.

So it would seem the days of fast sales in China are over for the time being. But the country is continuing to develop and communist leaders are promoting development of a new middle class. Naturally, these new consumers also will want to drive new cars – a sign of a higher standard of living in China.

In addition, 125 cities in China have populations of more than 500,000 people, and their residents will need cars. So companies such as Audi and Volkswagen are confident that Chinese buying power will fuel more sales again in the future – especially in the mid-size and compact markets.

Chinese Growth Slows-01 (2)

 

Frank Sieren is Handelsblatt's correspondent in China, Ning Wang is a reporter in Beijing. To contact the authors: [email protected]