Automakers' Next Big Worry: A Sales Slowdown in China

Automakers' Next Big Worry: A Sales Slowdown in China
Automakers' Next Big Worry: A Sales Slowdown in China

The major players in the auto industry have had it rough in the past few years, with the massive sales declines caused by the recession, and more recently, the body blow to their manufacturing and parts supply chains from the disaster in Japan. But the next challenge they face is already looming on the horizon: A slowdown in Chinese car sales.

Auto and light truck sales in China were up only 6.5% in March, well below the double-digit increases of recent years. And it's not a nation any automaker can ignore: China passed the U.S. as the No.1 vehicle market in the world two years ago.

When the recession hit, it cut auto sales in the U.S. from 16 million in 2005 to only 10 million in 2009. Other major car markets suffered similar drops -- with the exception of China.

Now, global auto manufacturers face the disruptions of the Japanese earthquake and tsunami, which has led to the shuttering of some of the nation's car plants, and a reduction of the exports of car parts essential to manufacturing in other regions such as the U.S. and Europe.

But the longer term financial fate of U.S. auto manufacturers rests to a large extent on China. GM (GM) is the market sales leader in the People's Republic, and its production there is well ahead of most other manufacturers, except Volkswagen (VLKAY).

China's drop in car sales growth could have been triggered by several factors. The first is that tax breaks for fuel-efficient cars ended at the beginning of 2011. Another is that there's some evidence that the savings rate is up again in China. The middle class in the People's Republic has only existed for a few decades and its evolution is not complete.

But the most ominous possible cause for the recent change in car buying habits is that inflation has caused prices of commodities-based products like food and clothing to soar, which is taking a bite out of Chinese consumers' discretionary income.

GM isn't the only car company which will be hurt by a deceleration of sales growth in China. Ford is anxious to be a significant force in the Chinese market, as are most other major manufacturers, particularly the Japanese. Toyota (TM), Honda (HMC), and Nissan (NSANY) have seen sales begin to slip in their home market of Japan, and the U.S. market is already highly competitive because of the presence of European and Korean firms, as well as the resurrected GM and Chrysler.

Automakers and their investors consider a rebound of U.S. sales to be critical to their future prospects. But it is slowing sales growth in China that should be their real concern.

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