Friday, April 22, 2005
Wheels
Razor-thin margins challenge auto makers in China
Reuters
Shanghai, April 22
An escalating price war and rising materials costs are rapidly shaving profit margins for global car makers in China, the industry's promised land as growth stagnates in the developed world.
Once an easy profit centre providing double-digit margins, China has become one of the most intense battlegrounds for auto companies.
As many as half of the car makers in the country are losing money, according to some estimates, including market leader Volkswagen AG.
While growth in China's passenger car market is widely expected to reach 10 percent this year after a 15 percent expansion last year, experts note that competition is also unmatched. More than 100 local marques and 28 global brands vie for customers.
"Obviously this is a great time to be a consumer," Steven Wilhite, senior vice president at Nissan Motor Co., told reporters at the Shanghai auto show this week.
Thinning margins are bad news for manufacturers like VW and General Motors Corp, for which China is the second-biggest market after their home grounds. Mazda Motor Corp. makes 15 percent of its money in China.
Racing to woo customers away from rivals, car makers flooded the Chinese market with 115 models last year, nearly double the number available in 2002, according to Japanese research firm Fourin Inc.
That means fewer cars sold per model, reducing economies of scale and putting pressure on profits. California-based researcher J.D. Power and Associates says the average sales per model fell to 26,000 units last year, from 37,000 in 2002.
Only a year ago, most car makers couldn't build fast enough to satisfy demand. But the wave of new entrants and slowing sales have left many with a supply glut, prompting rapid and deep price cuts.
"The price war is very severe," said Etsuo Hattori, chief representative of Toyota Motor Corp.'s China office. "All we can do is try to cut production costs through more localisation."
General Motors, which is heading the price war, says the trend is likely to continue.
"Margins were very high this time last year but there have been several price reductions, and there will continue to be additional reductions as the consumers have more choices and as more competitors come to market," Troy Clarke, head of GM's Asia-Pacific division, told an industry seminar.
Prices in every segment have fallen steadily, with the biggest drops in the fastest-growing "B" compact class.
In the final quarter of 2004, average prices plunged 16 percent from the year before to less than 80,000 yuan ($9,666), Nissan said, bringing them closer to international prices.
"Many cars sold in China are now priced below international levels if the high taxes are excluded. This situation came one year earlier than we expected," said Katsumi Nakamura, head of Nissan's local joint venture, Dongfeng Motor Co.
That, on top of an expected 15 percent rise in steel prices on top of last year's 20 percent jump, could squeeze profits to the point where further price cuts would not be feasible, he said. Most car makers say building in China costs more than in Japan or the United States.
"If this situation continues, we will have to transfer (the higher costs) to product prices as a last resort," Nakamura said.
Car makers are already facing margin pressure from the shift in demand to cheaper and smaller cars like Hyundai Motor Co.'s Elantra from expensive saloons like the Honda Accord and GM's Buick Regal.
Michael Dunne, president of research firm Automotive Resources Asia, noted that as recently as two years ago, margins on such full-sized sedans were "best in the world" at $3,000 to $5,000 per vehicle.
The trend so far this year seems to indicate a further squeeze: For the first two months of 2005, homegrown brand Chery Automobile Co.'s QQ minicar, which costs $4,000 to $6,800, recorded the fastest growth.
"Margins there are closer to wood shavings than anything you can put in your pocket," Dunne said. At this rate, the ratio of cars priced below $12,000 would likely reach 45 percent this year versus 24 percent in 2003, he noted.
"In India, 75 percent of cars are sold for less than $12,000. That's the direction that China's going in," he said.
Luxury car makers were the anomaly, with bullish expectations for margins.
After slashing prices for its locally built 3-series and 5-series sedans by 13-15 percent in January, BMW said there would be no more this year. DaimlerChrysler AG refuses to cut prices on its Mercedes-Benz cars in China.
Ruediger Grube, the head of DaimlerChrysler's China business, told Reuters in Shanghai that his profit margins were not at risk because the group was not saddled with idle capacity.
Despite tough prospects for the rest, mass-market brands are still upbeat about the world's third-biggest car market.
"There is no other major market around the world with double-digit growth prospects," said Atsuyoshi Hyogo, chief of Honda Motor Co.'s Chinese operations. "This is a market of great potential."
© HT Media Ltd. 2005.