Light vehicle sales remain 'bubbling hot'

Even as most nations grapple with the global economic downturn, China's automotive market continues to dazzle.

Maintaining its position as the leading light vehicle market in the world, China recorded sales of 1.03 million light vehicles in July - defined as passenger cars and light commercial vehicles less than 6 tons.

The monthly figure is a 60 percent increase over the same period of 2008 and brings the nation's year-to-date light vehicle sales growth to 27 percent. The rapid expansion in July is partially explained by a decelerating growth rate in July 2008 - but mainly the market is just bubbling hot.

Strong July sales pushed the seasonally adjusted annual selling rate (SAAR) beyond 14 million units, a gain of more than 10 percent over the pace recorded in June and moved the year-to-date SAAR to 11.6 million units.

Vehicle sales were equally strong in both passenger vehicles and light commercial vehicles, as well as across most vehicle segments.

Sales of passenger vehicles jumped by 61 percent to 702,000 units for the month, while light commercial vehicles increased by 58 percent to 325,000 units.

Light vehicles sales in July are historically weaker than other months of the year.

Soft sales in past years often led to the most generous sales campaigns of the year from manufacturers eager to meet their full-year sales targets.

Yet few manufacturers offered incentives this July, and only the weakest companies are worried about meeting their sales targets.

Tax cuts and government subsidies provided the incentives that in past years came from manufacturers.

Automakers are facing capacity constraints as they work to keep up with blistering demand. Several companies recently announced expansion plans, with Dongfeng Nissan, Audi, Chang'an Automobile and Great Wall Motors all making moves to open new plants, and SAIC-GM Wuling, Shanghai VW and BYD upgrading existing lines to raise output.

Expanding capacity suggests a growing confidence in China's auto market and the underlying economic factors supporting the industry's growth.

Yet that confidence is not shared by everyone.

Increasingly, the sustainability of China's economic recovery is under scrutiny. Loose credit terms from banks in the first half of the year threaten a rise in non-performing loans and an overall weakening of the financial system.

China's export sector remains challenged and related foreign direct investment is down significantly.

Conflicting reports suggest that indeed some Chinese officials believe a tighter monetary policy is required to maintain stability and quell the enthusiasm in property and stock markets.

Looking forward, the effect of the stimulus package is weakening, so light vehicle demand in the second half of 2009 is expected to be slower than year-to-date figures.

The economy will likely face turbulent times, but we believe policymakers will continue to draw on the considerable resources available to maintain the economic recovery. But it's not a straight shot. There are risks.

Given the momentum through July 2009 and the relatively lackluster figures of 2008, we expect the growth rate for the full year of 2009 to reach a remarkable 25 percent for passenger cars, and 39 percent for light commercial vehicles.

While the world debates its economic condition, China remains the largest and fastest growing automotive market in the world.

Marvin Zhu is a senior market analyst from JD Power Consulting (Shanghai) Co Ltd

(China Daily 08/24/2009 page7)