Automakers often say that these changes are the typical growing pains experienced in a maturing market. They point out that lower percentage gains from a very high base still translate into large overall increases in car sales.
But China’s role is far more crucial than executives admit as the market accounted for a quarter of all global car sales by European automakers last year, according to IHS Automotive. And, more importantly, China accounted for 40 percent of all automakers’ global profits last year -- roughly as much as Europe and North America combined -- a recent McKinsey study showed.
“BMW management’s comments on China need to be heeded,” Bernstein analyst Max Warburton wrote. The analyst added in a separate note in late April that while BMW was, at that point, the only automaker to warn about China, others will follow, which is why the firm is “growing more pessimistic” about profitability in China. “Demand is easing, consumers are pickier, [they] buy smaller engines and demand discounts. This is going to catch up with everyone,” Warburton wrote. He also noted that VW and Ford had cut prices by 5 percent to 10 percent and that “the pattern of sales over the course of each month is becoming unhealthy.”
The slowdown comes at the most inopportune time for Europe’s carmakers, whose margins are already being squeezed by the billions in costs they are forced to swallow for developing low-emissions technology to satisfy tougher regulations at home. Automakers desperately need a robust China to help offset a collapse of sales in Russia as well as disappointing results in Brazil and India. “Of the motors driving the global economy – the BRICs – basically only “C” for China is left standing,” Volkswagen CEO Martin Winterkorn said in mid-March.
Pollution & inflation
China is turning its back on the debt-financed property and infrastructure bonanza that fueled its growth. While it did lift overall wealth and income standards, it unintentionally lead to dangerous levels of pollution and bouts of speculative inflation in real estate markets. Jochen Siebert, founder of Shanghai-based consultancy JSC Automotive, warns mismanaging this complex transition could let the air out of what he believes is a massive credit bubble. “When you talk about real estate, which accounts for roughly a third of the economy, we are already well into crisis mode here. Most developers are now on the verge of going bankrupt,” he said.
McKinsey’s economic think tank, MGI, found that the country’s public and private sector debt has nearly quadrupled since the pre-crisis year of 2007, rising from $7.4 trillion to $28.2 trillion. China is now more indebted than the U.S. relative to the size of its own economy. “China is coming to an end in many ways. If the status quo is maintained and there is no reform, the country could suffer a hard-landing -- I can even imagine a recession,” he added.
Not only do carmakers face a cyclical downturn, they also have to contend with structural declines in key parts of China resulting from attempts to rein in pollution and manage congestion. Porsche finance chief Lutz Meschke fears authorities might be pressured into eventually banning all cars running on gasoline from cities such as Beijing and Shanghai, especially now that the Chinese documentary “Under the Dome” has created a growing awareness of the environmental problems. “At playgrounds you will always find a red flag, which goes up to tell parents when it’s not safe for kids to play outside,” he said. “It is no longer the exception [in Beijing], it has become the rule.” To guarantee it won’t be shut out of the Chinese market Porsche is developing an electric car that Meschke calls a “life insurance policy.”
The government is trying to subsidize a fledgling market for New Energy Vehicles, electric cars and plug-in hybrids that can go at least 50km on electricity, targeting a half million sales this year. Chinese brands are making progress since only locally built NEVs benefit from government subsidies. Scientists warn, however, that pushing NEVs could backfire, causing CO2 to rise in the short term as the country’s power grid relies on burning coal containing heavy amounts of ash, sulfur and other impurities.