Parts Investment Thrives Despite China's Slowdown in Car Sales

Suppliers encouraged by prospects for steady growth

Despite numerous signs pointing to a slowdown in auto sales in China, investment in auto parts production there is proceeding apace amid optimistic expectations of growing aftermarket demand and steady long-term growth in the auto market.

A good part of the new investment is aimed at supporting technology upgrading and the development of new-energy cars. Some automakers (and the government) realize that China still has a long way to go to take global leadership in auto technology, and are determined to boost the country in that direction.

Auto Panic

China's auto market has maintained an annual growth of over 20% for more than a decade and, in 2009, became the world's largest with sales of more than 13.64 million units, up 46.15% from 2008. The industry continued booming last year, with production and sales in the first 11 months hitting record highs of 16.4 and 16.39 million units, respectively, up 33.71% and 34.05% from the same period of 2009.

This growth has not come without some unhappy side effects. Beijing is reported to suffer the worst traffic jams in the world, and a similar problem burdens traffic in other big cities like Shanghai, Guangzhou, Shengzhen, and Hangzhou.

In addition, car emissions have become a major source of air pollution in China's metropolitan areas. Rising gasoline prices, insufficient parking space, and worrisome road safety are among other troubles that beset drivers every day. These problems have given rise to a phenomenon, termed "auto panic," which has reportedly spread through major cities around China.

Beijing and major cities in Jiangsu and Zhejiang provinces, among others, have taken steps to deal with the "panic." The Beijing City Government announced late last December that it would limit new car registrations to 20,000 per month, or 240,000 per year. The city also designated heavy-traffic areas where permits are required for entry. These measures are expected to cut annual auto sales in Beijing by more than a half, or over 400,000 units. Three quarters of a million new autos were registered there last year alone, bringing the city's total to more than 4.8 million at the end of 2010.

Other major cities around China are expected to follow Beijing's example. This will reduce the rapid growth in auto registrations-and put a damper on sales.

Long-term Growth

In fact auto sales in China began weakening last May and continued slipping until the fourth quarter, when sales surged as consumers rushed to buy cars before tax cuts and the government's "Autos to the Countryside" and "Clunkers for Cash" incentive programs expired at the end of the year.

The sales slowdown reflected a toughening market situation, with rising inventories forming a sharp contrast to the zero-inventory situation of 2009. Carmakers were also besieged by other challenges in 2010, including changing economic conditions, reduced auto sales incentives, severe price wars, growing "auto panic," disappointing car sales in the countryside, and stricter eco-friendly standards.

Despite the cooling of the market, the China Association of Automobile Manufacturers (CAAM) remains confident about market prospects. "In view of the low ratio of car ownership in the overall population, there is still a big potential for China's auto market to grow over the coming decades," commented a representative of the Association. "In major countries of the world, around 100 out of every 1,000 citizens own cars, whereas in China the ratio is only 4%."

While the growth in auto sales is expected to slow to 15% or so in 2011, total sales for the year will still top 20 million.

"Despite the weakened market momentum, China's auto market can maintain an annual growth of at least 10% over the long term," said a ranking executive of Volkswagen in China. He based his optimism on China's sustained economic growth and rising living standards: "While people become wealthier, they will try to purchase cars of their own."

Aftermarket Services

Whatever the future market landscape might look like, the high growth of auto sales in China over the past decade has created considerable business opportunities for aftermarket (AM) maintenance, repair, and related services. These opportunities constitute a strong incentive for investment in the production of auto parts.

For auto parts makers, the AM market is a niche where they can promote their image and position, and where they can launch products under their own brand names. For example the Tong Yang Group, which has been working with China's top five automakers as a satellite parts supplier, is this year focusing on the development of its AM business and predicts an annual growth of 20% in its AM sales.

AM suppliers also see booming business opportunities in the U.S., Europe, and other areas where the auto market has become mature and drivers need regular car maintenance.

Technology Upgrading

Satellite parts suppliers play an important role in supporting automakers in their pursuit of technological advancement.

Last December the SAIC group, which is the largest auto conglomerate in China, announced a plan to raise over 10 billion yuan for a capital increase designed to support the group's effort to develop key auto parts, like clutches and automatic transmissions, on its own. This is crucial to the group's ambitions to pursue advanced technology and develop own-brand automobiles.

At the same time, SAIC is planning to invest over 5 billion yuan in brand promotion in both the domestic and international markets, and another 1.18 billion yuan in the development of commercial vans. These plans call for the launching of 14 new own-brand cars and vans by 2014.

A new five-year auto industry development plan, announced by the government last October as the blueprint for China's development of new-energy cars during the period of 2011-2015, will encourage new investment in parts to support the government's green-car policy.

Electric vehicles (EVs) offer a promising niche for new auto-parts investment, and China, among other countries, is actively engaged in EV development. Several new EV models are to be unveiled there this year alone, and the global EV market is projected to grow to over 4 million units by 2015.