China's Auto Market May Not Be As Strong As Everyone Thought

July 9, 2015

Some pundits have predicted that China's auto market is unstoppable. To prove their point, they often point to the country's booming middle class, who aspire to own the same luxuries as their counterparts in the West.

On the face of it, the numbers make sense. China is massive -- with nearly 1.4 billion citizens, it's more than four times the size of the U.S. Based on population alone, it seems that China's auto market could easily swallow that of the U.S. whole. Automakers have been working overtime to build presences throughout China to serve consumers eager for car ownership.

But not so fast. New data shows that car sales have stumbled in China for the first time in more than two years, and recovery won't be quick or easy.

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What's the problem? Analysts point to several issues:

1. Economic troubles: China's economy is cooling off, with the Shanghai Composite Index having tumbled about 30 percent over the past month. That may not seem like much of a backslide, given the Index's 150 percent growth over the last 12 months, but the volatility makes investors and government officials nervous. Housing, construction, manufacturing, have slowed as a result, and revenue from exports continues to decline. Analysts predict that the cooling trend will continue at least through 2016.

2. Domino effect: Consumers around the globe are often spooked by up-and-down markets, but the effect is amplified in China, where that kind of uncertainty -- and the consequences of it -- are relatively new. That's being felt keenly at China's auto dealerships, where shoppers who'd been planning to buy new rides have cancelled orders until things level out. Those cancellations, in turn, contribute to a vicious circle, fueling China's economic decline.

3. Slimming auto subsidies: For many years, the Chinese government has subsidized auto purchases, particularly for green vehicles like hybrids and electric cars. That's not just because government officials want to clean up China's notoriously bad air (though that's important, too). It's also because, like Elon Musk, China sees a revolution on the horizon -- an energy/transportation revolution carried out in electric cars -- and it wants to be a leader in that movement. Unfortunately, now that the country has hit some economic snags, those subsidies are disappearing, and with them, some auto buyers.

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In the end, China's growth trend will almost certainly continue. Consumers will eventually get used to market volatility, and if things get too bad, the Chinese government is still centralized enough to institute reforms that other countries couldn't. However, in the interim, it's going to be tough going to automakers -- especially those like General Motors and Volkswagen that depend on China for a huge chunk of their sales. 

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