China’s Auto Market Faces Crisis Due to

　　On July 5 2010, China Automotive Technology and Research Center (CATARC) held the Information Briefing of Development of China's Auto Industry in the Beijing News Building. On the conference Zhao Hang, the Director of CATARC released the development situation of the development of Chinese auto industry in June and the first half of 2010. He said the in June the auto production of China totaled up to 1,294,200 units, down by 1.41% compared with last month and up 12.40% year on year. The sales were 1,132,000 units, down by 5.25% compared with last month and up by 13.97% year on year. The production and sales went lower compared with May. In the first half of 2010, the overall production and sales of vehicles were respectively 8,472,200 units and 7,185,300 units, up by 44.37% and 30.45% compared with the same period of 2009.

　　Both production and sales increased by 30%. Obviously based on the situation of the first half of 2010, China's auto production and sales will rank the first in the world. On the surface, China's auto industry will still enjoy the golden period starting from last year. However, if we dig deep into those shining data, we cannot help worrying that a crisis is approaching and Chinese auto industry should be warned.

　　First concern: There are too many inventories. Production is much higher than sales.

　　As to the auto market in the first half of 2010, the margin between production and sales is nearly 1.3 million units. Now China's annual automotive sales can total up to over ten million cars. Thus the stock accounts for 10% or less. The average adding stock for every month is 200,000 units, which seems not too much. So why should we feel worried?

　　The reason is that in the automotive industry there are special hidden rules. There is a great gap between the published data and the real sales statistics. We cannot tell how big the gap is since the new-car registrations are secrets in China. So for that reason, the gap between output and sales has always been artificially modified. For example, there are a large number of new cars around a 4S dealership. However, the sales data of the first three months shows that there were nearly no stocks. In this way, we have enough reasons to worry that the 1.3 million inventories are just the tips of an iceberg. Is it possible that the inventory has reached two million units or more? If so, the problems brought by inventory cannot be ignored.

　　Second concern: The situation of market is rather weak. Output and sales dropped compared with last month.

　　In June, China's automotive output dropped by 1.41% compared with last month and up by 12.40% year on year. Sales were down by 5.25% compared with last month and up by 13.97% year on year. In June, both output and sales were down compared with last month. The year-on-year increases were narrowed. The cycle of inventory continues being longer. From the second quarter of 2010, June is the third consecutive month when Chinese auto market dropped.

　　So what should we worry about? If the gap between output and sales is formed, it will be difficult for us to eliminate it. At the same time, according to the tradition, there will be more and more inventories. If no great change takes place, the gap between output and sales can be hardly reversed. That’s the reason why both output and sales dropped compared with May. That thing is just like an engine. If an engine is started, you will have to use greater power to stop it.

　　Third concern: The cycle of inventory is longer. Automakers have to shoulder more pressure.

　　From the auto inventory table, we can tell that in the first half of 2010 the cycle of inventory was becoming longer by month. In February, the cycle of inventory is 41 days. In June, the cycle became 55 days, up by 14 days, approaching the warning line of two months.

　　In accordance with the unwritten rules, except for few giant dealerships which have abundant funds, most auto dealerships can only bear the inventory cycle of two months or so. Beyond this cycle, on the one hand, there will be problems with bank loans. On the other hand, manufacturers have to shoulder the pressure of inventory. If automaker sticks to the original plan of production and sales, it has to use more funds and the cycle will also be stretched. Currently, only several really popular models can enjoy hot sales. The dealerships in Beijing, Shanghai, Guangzhou and Chengdu are sparing no efforts to reduce the inventory. A dealer of a joint venture brand said that consumers were just holding the money in hand and don't really buy cars, resulting in larger inventory. The dealer hoped that the automaker could adjust the capacity as soon as possible.

　　Now the inventory is near the limit. The gap between production and sales is becoming larger. The cycle of inventory is not far from the warning line. All of those concerns are concentrated in the increasing inventory. In fact, we have to worry about other factors. The stimulus effect of policy is weakened. Some stimulus policies will come to an end. With the fluctuation of exchange rate as well as the weak situation of European and American economy, the global economy may hit the bottom once again and Chinese exports will be affected. What's worse, the labor cost is increasing and stock market trades are in decline. The property market is facing downturns and people expected that inflation may emerge. In addition, the impact brought by the change of monetary policies cannot be ignored. The growth of domestic auto market in the second half of 2010 will face more challenges. We can say the crisis is approaching.

　　We would like to remind people that we should see farther. We should discuss about how to avoid downturns rather than how to maintain growth. That is not a useless warning. If we do not make a change, auto market will definitely face downturns. You'd better not doubt about that opinion. Central Government has carried out intensive research. A second wave of stimulus policies may be introduced. (Translator: Qinghua/Hanxin)

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