2012 is a very difficult year for China's auto industry. According to semi-annual reports released by carmakers, 90 percent of carmakers didn't reach half of sales target set in the beginning of the year. Among them, China's own brand made the worst performance. Furthermore, other cities are inclined to follow Guangzhou's purchase restriction policy.

　　Each carmaker still actively expands production capacity though facing a sluggish market. In particular, many joint ventures choose to build new factories in order to increase production capacity in China.

　　SoHu:In accordance with the development of such a situation, will China's auto industry face the pressure of overcapacity，just as the European car market is suffering a major crisis.

　　Klaus:In the first 7 months of 2012 (wholesale) sales in the China passenger vehicle market (cars, MPV, SUV) have grown ~9%. Nevertheless, we observe an increase in dealer inventories which leads to pressure on new vehicle prices, as salesmen are tempted to grant more and more rebates to clear their stock. In other words, there is considerable risk for price war.

　　While market growth has slowed to a more normalized level, there is consensus that China will remain in growth logic over the next years. This is why car manufacturers need to increase capacities to be able to deliver on future demand. However, to avoid over capacities, a gradual increase of output capabilities should be adopted.

　　This is a fundamentally different situation from Europe which suffers a structural crisis with declining sales. In other words, existing production capacities need to be closed to adjust to consumer demand.

　　SoHu:In the face of the downturn trend of the car market, how can carmakers, especially China's own brand, make adjustments and improvements? Does China's auto industry need to seek structural changes and adjustments?

　　Klaus:I consider the slowdown of market growth as normalization after an artificial sales increase due to stimulus measures in 2009 and 2010. Market forces are supposed to lead to economic consolidation and a “clean up” of non viable car brands, notably of domestic homegrown car makes with too small new vehicle sales. Besides the need for Chinese car manufacturers to upgrade vehicle technology, improve quality and build strong brands, all market players have to understand consumer demands and cater to requirements of future car buyers to ensure sustainable success. Two aspects are most critical: the market entrance of the young generation with different expectations towards cars, and the growing share of second-time car buyers whose previous vehicle experience influences their future purchase decision.

　　With the rise of second-time car buyers the used vehicle market gains importance, and requires a structural revision and a legal review.

　　SoHu:Compared with the spending stimulus policy pushed by government several years ago, in the past two years government has not only canceled the favorable policies, but also issued more purchase restriction policies. In the context of such policy, what kind of measures should auto industry take?

　　Klaus:Car manufacturers continuously need to push for innovation in order to build more fuel efficient vehicles and promote sustainability. Ideally, there should be a close dialogue between all stakeholders (including policy makers) to establish hand-in-hand the required infrastructure and traffic management systems, but also cost barriers for vehicle ownership.

　　As already mentioned above, a structural and legal revision of the used car market is necessary.