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Carmakers fret over China's slowing auto market

Carmakers fret over China's slowing auto market
Sales staff wait for customers beside a vehicle model at a Shanghai Volkswagen dealership in Beijing on Aug. 5. (Rolex Dela Pena / EPA)

A decade ago, Chinese drivers bought just 6 million cars annually, less than a tenth of the vehicles sold worldwide.

By last year, after an explosion of wealth for the middle and upper classes there, they bought almost 24 million vehicles — accounting for more than a quarter of global sales and a huge share of profits for major automakers. Cars have become a key symbol of success among the Chinese.

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That's why automakers such as Ford, General Motors and Volkswagen are watching the turmoil in China's economy and stock markets there with trepidation.

"What happens in China is the most important factor globally for most automakers," said John Hoffecker, a vice chairman at AlixPartners and head of the firm's global automotive practice. "Companies like BMW, Mercedes and GM that were over there early have reaped significant rewards."

GM, for instance, garnered 35% of its global sales and 44% of its profits in China last year, according to an analysis by AlixPartners. It's Buick brand is particularly dependent on Chinese sales — totaling 919,582 last year, compared with 228,963 in the U.S.

Buick sales have dipped 1% in China since the first of the year — but that's accelerating, falling 7% in July on a year-over-year basis, according to LMC Automotive, an industry research firm. Chevrolet sales have sagged 16% through the first seven months of this year in China, to 346,184, LMC said.

Even before the recent markets crisis, sales in China had slowed following the period of rapid growth. After rising by an annual 16.6% for the past decade — to become the world's largest car market — Chinese auto sales growth is projected to slow to about a 5% annual average over the next several years and then to about 4% between 2018 and 2022.

Although China's economy grew at 10% or more a year for much of the last quarter of a century, it has fallen off that pace. International Monetary Fund said Chinese policymakers have pumped up growth with excessive lending and risky investments.

Now, Chinese leaders are trying to reposition the economy to provide better-paying jobs in the service sector rather than low-wage factory jobs. They're looking to encourage more innovation and a more robust consumer sector, moves that eventually could benefit the auto industry.

But economic growth slowed to 7.4% last year and is expected to ease further to 6.8% this year, according to IMF estimates. Some analysts believe it could fall to less than 4%.

A host of other factors may be hampering sales in China as well.

It's hard to get license plates in big cities now because there is a lottery system and the plates are expensive. Growing traffic congestion makes it harder to drive, and car services such as Uber are a fast-growing alternative.

Still, the nervous stock market is complicating matters. The Shanghai Composite index has lost 39% from its June 12 high and dropped another 6.46 points, or 0.35%, Wednesday, to close at 3,160.17.

The plunge has spooked markets worldwide as investors raise concerns about the Chinese government's efforts to transform the nation's economy.

In Beijing, those who do own cars are prohibited from driving them at least one day a week, and sometimes more, as part of a government effort to reduce pollution and traffic.

Still, the nervous stock market is complicating matters. It has spooked markets worldwide as investors raise concerns about the Chinese government's efforts to transform the nation's economy.

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In the near term, that's particularly troublesome for automakers heavily invested in China, according to analysts.

"There were people who took money they would have used buying a car and lost it in the stock market — and they won't be in a position to buy a car any time soon," said Steve Brown, the automotive analyst at Fitch Ratings.

Longer term, the prospects for the Chinese auto market remain good.

"The future for the Chinese automotive market is still huge once it gets through this correction," said Jeff Schuster, an analyst for LMC Automotive. "The number of vehicles per adult is still very low, and there is lots of room for growth outside China's largest cities."

The country will remain the largest auto market for the foreseeable future. Carmakers will sell about 17 million vehicles in the U.S., almost 7 million below China.

"That will be about as close as the U.S is going to get," Schuster said. "We are a distant No. 2."

Aside from automaker profits, falling auto sales in China may have little effect on the broader U.S. economy.

Although China is the second-largest importer of U.S.-built vehicles — totaling 305,303 vehicles last year, with a value of $9.7 billion, according to the U.S. International Trade Association — that's still a tiny fraction of the vehicles purchased in that nation last year. The vast majority are built there, often through partnerships with local manufacturers, in part because U.S. auto exports face a 25% tariff in China.

In the long term, General Motors still has a bright outlook for its future in China.

"We expect a more volatile market in China as growth there moderates," said Tom Henderson, a GM spokesman. "But we continue to believe the market will grow long term."

The automaker is changing the mix of vehicles it sells in China to adjust to changing consumer tastes. A joint venture partner introduced the Baojun 560, a crossover, in July. GM also has seen good sales for its new Buick Envision sport-utility vehicles and recently increased production.

"Focusing on new products and achieving overall cost efficiencies are helping GM survive the slowdown," Henderson said.

Other major automakers have at least as much at risk in China as GM.

Volkswagen — which for the first half of this year overtook Toyota to become the world's largest automaker — sold 36% of its cars there, accounting for 41% of profits, according to the AlixPartners analysis. BMW sold 25% of its cars in China, representing 31% of profits.

Many auto companies are depending heavily on China for future sales growth, Hoffecker said.

French auto company PSA Peugeot Citroën has seen its core European market stall and is relying on China for 100% of its predicted sales growth for the 2014-2019 period, according to an AlixPartners analysis. Honda is looking to China for 61% of its growth during the same period. Toyota and VW are dependent on China for 50% of their sales growth during those five years.

As evidence of China's slowing economy mounted earlier this year, investors started to bail out of the automotive stocks with the most exposure.

Shares of GM, for example, hit an annual high of $38.87 on March 20 but have fallen 25% to close at $29.21 Wednesday. VW shares are 36% off the high they hit on March 16. BMW shares have fallen 35% since the same day. Shares of Ford, which has a smaller China footprint, have plunged 16% since hitting a high on March 23.

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Luxury car companies could be most at risk, said Junheng Li, who heads research at JL Warren Capital.

China's "continuing anti-corruption campaign and the evidence of continuing tensions within the leadership make a low profile wise and desirable," Li said.

That could slow sales of flashy cars.

At least one luxury car company — Palo Alto-based Tesla — has seen little impact on its bottom line. But that's only because the maker of premium electric sport sedans has yet to sell many cars in China.

Tesla's financial forecasts aren't reliant on Chinese sales growth, said Ricardo Reyes, the company's spokesman. But it is working to position its vehicle as a smart alternative to a gasoline-powered German luxury sedan.

"Tesla is not seen as an ostentatious car in China, but rather as a green car — a choice for people who are trading in their gas guzzlers with the V-12 engines," Reyes said.

Twitter:@latimesjerry

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