Auto sector still a good choice for investment

Foreign automakers continue to plow money into factories in China, the world's largest car market, even as the biggest economic slowdown in a quarter of a century crimps sales growth.

Market leaders Volkswagen AG and General Motors Co show no signs of letting up on their planned investments, while Toyota Motor Corp and Ford Motor Co are also pursuing new China expansion plans.

That is in spite of the economic slowdown further depressing the car market in January-March, when sales grew only 3.9 percent, compared with 9.2 percent a year ago and way below the 7 percent growth that the China Association of Automobile Manufacturers predicts for this year.

"It's still one of the markets with the highest growth in the world so we're not disappointed in this," Carlos Ghosn, CEO of both Nissan Motor and Renault, said at the Shanghai Auto Show on Monday. "We are investing in China and we are going to continue investing in China."

Foreign automakers, many of which will unveil new products for China at this week's show, including Ford's redesigned Taurus sedan, are not fretting over the first-quarter slowdown.

But if the fallout from the broader economic slowdown bleeds into the rest of the year, global automakers may need to reconsider their China expansion plans, said James Chao, Asia chief of IHS Automotive.

A handful of foreign automakers are still outperforming the market, with Ford, for example, posting 9 percent sales growth in the first quarter.

"We're very conscious that part of what we do is match demand with supply. We deal with reality, and if the reality tells us to slow down production, we'll slow down production," Ford's Executive Chairman Bill Ford said on Monday, noting that growth in China was still "quite robust".

IHS's Chao added the market was still divided into two segments, with domestic manufacturers hovering around 60 percent capacity and the international joint ventures at 80-85 percent.

Anthony Lau, Shanghai-based research director for consultancy TNS Sinotrust, said even strong single-digit growth in car sales in China is much better than in markets elsewhere.

China accounted for more than half of the industry's total spending on new or expanded capacity last year, with plant investments worth $12.7 billion, according to an annual Canadian study of automakers' outlays.

Foreign automakers are likely to hoover up more idle capacity from smaller domestic firms, said Chao at IHS, as Ford did in acquiring a factory from Harbin Hafei Automobile Industry Group Co Ltd that will add 200,000 vehicles per year in capacity when upgrades are finished in 2016.

That follows Ford's launch last month of a new factory in Hangzhou, Zhejiang province, with annual capacity for 250,000 vehicles.

Even Toyota, whose first-quarter sales slipped 0.1 percent, is ending a years-long expansion freeze, spending $440 million to add a new facility and a third line at a factory in Guangzhou, Guangdong province, which could start production in 2017 with capacity to make about 100,000 cars a year.

Volkswagen is targeting China capacity of 5 million vehicles a year by 2019, up from 3.5 million in 2014, as part of a 22 billion euro ($23.3 billion) investment push, a company spokeswoman said, and GM has its sights on hitting that 5 million number a year earlier.

By the time these expansions come online, the years of breakneck double-digit growth will likely be long gone: economists predict 7 percent GDP growth this year and a further notching down to 6.8 percent in 2016.