US:Ford, GM discount cars in China - Ford Forums

Stacy94PGT · 10-26-2004, 08:08

Ford, GM discount cars in China

Automakers offer huge savings as sales slow down.

By Christine Tierney / The Detroit News

As auto sales slow down in China, Detroit's automakers find themselves in the familiar position of offering some of the biggest discounts in the country's newly competitive small-car segments.

Prices on General Motors Corp.'s Buick Sail compact and Ford Motor Co.'s rival Fiesta have dropped more than 15 percent in the latest round of price cuts in the Chinese market, according to a study by J.P. Morgan Securities.

That compares with a 13 percent price cut in Volkswagen AG's no-frills Santana sedan last month, a 6 percent cut in Honda Motor Co.'s Fit compact and 3 percent in Toyota Motor Co.p.'s Corolla compact.

China's auto industry had been shielded in recent years from the price wars raging in North America, Europe and other regions because surging demand far outstripped supply. But with sales now slowing down, heightened competition is eroding car prices in China -and automakers' profits.

The trend is hitting middle-market producers hardest. Volkswagen AG, which has the biggest market share of any foreign carmaker competing in China, has seen earnings shrink dramatically.

"In our view, VW's profits from China may drop from almost $1.2 billion in 2003, to maybe $190 million in 2005," says auto analyst Christian Breitsprecher at investment firm Deutsche Bank.

On Oct. 14, GM reported profits from its Chinese operations fell to $80 million in the third quarter from $142 million in the year-earlier period.

Brokerage firms have sounded alarms, with Morgan Stanley lowering its rating on the Chinese car sector to "cautious" in mid-September from in-line. Brokers have also downgraded ratings on Chinese venture partners of foreign automakers.

Industry experts still hold a bullish view of the market in the long term, expecting it to surpass the U.S. and Japanese markets eventually and become the world's biggest. But the slowdown serves as a reminder that the market's advance will be riddled with bumps.

So far this year, car sales in China are up 17 percent, after a 61 percent rise in 2003. But the deterioration looks starker when viewed on a quarterly basis: After a 44 percent surge in the first quarter, car sales in China grew 22 percent in the second quarter and flattened out in the third. In September, they fell 2 percent from year-earlier levels.

"Waiting lists for cars are disappearing," says Ashvin Chotai, director of Asian automotive industry research at the data and consulting firm Global Insight. "Last year, there were six- to eight-month waiting lists for the (Honda) Accord - that's no longer the case."

Automakers cut their production in China by 8 percent - the first year-on-year drop in output since 2001. But prices are expected to keep falling because inventories have been rising since spring, when the Chinese government clamped down on credit to prevent the economy from overheating.

The credit squeeze put the brakes on car sales because roughly one-third of car purchases hinge on financing.

Prices are falling across the board. But Ford and GM are exposed more than some rivals because they compete in small- and medium car segments where competition is ferocious.

JP Morgan analyst Frank Li says upper-medium and luxury cars still enjoy a price premium ranging from 16 percent to 45 percent over sticker prices for the same cars in Europe, Japan and the United States. But prices for low-end cars, such as the Buick Sail and Ford Fiesta, now match levels in other markets.

GM plans to produce Cadillac cars in China to expand its lineup, but the bulk of its sales in China are now Buick and Chevrolet models.

Overall sales in China are "holding up reasonably well, but we're selling more products at the bottom end and less at the top end," GM Chief Financial Officer John Devine said.

"We believe we'll get China back on track after the downturn is finished. Our best estimate for that today is sometime in a year or so," he said.

Most analysts agree that sales growth is unlikely to resume before next year.

Chotai says demand is also held back by Chinese consumers' expectations of further cuts in car prices. Ever since China joined the World Trade Organization in late 2001, car prices have been sliding from their once artificially high levels.

The arrival of more automakers, with more models, has driven prices down further by boosting competition.

"Consumers think, why buy a car today when it's going to be cheaper tomorrow?" Chotai says.