The World’s Largest Auto Market Is Tougher Than Ever

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

China, the world’s largest auto market, finally seems to be stabilizing after witnessing a series of ups and downs recently. The emerging nation is expected to experience 8% growth in the new year. This is good news for automakers, as generally China’s auto market outperforms the economy’s growth rate. However, this trend got disturbed in the 2008 global economic crisis, which made Chinese consumers lose their confidence and limit spending. The market started recovering from April to August 2012, and during these months passenger vehicles sales increased 10%.  But the market went down again as it suffered from a territorial dispute with Japan, which made Chinese consumers shun Japanese car brands. The situation seems to have improved with recuperating November 2012 sales as passenger vehicles sales figure picked up by 9%.

Despite the territorial dispute, 2013 appears to be a steady year for the auto industry. Though the outlook for Japanese automakers, including Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan, remains grim in the near future, it hasn’t taken a toll on auto investments. Foreign automakers are rushing in with huge investment plans to make up for their European misery. Though Toyota is experiencing a tough Chinese market, on the global front it is challenging the dominance of General Motors (NYSE: GM) to regain its top spot for 2012. In China, Volkswagen is fighting hard to grab GM’s position as a foreign brand.

Fight for the superior spot
November sales for Toyota, Honda ,and Nissan fell 30%, while Volkswagen was in momentum as sales went up 31%. The German automaker is heavily investing in launching new models to broaden its portfolio, build new assembly lines, and add more dealerships to beat GM’s position as the top foreign carmaker. It plans to invest $13 billion to build new production facilities and products in China over the next three years. The car manufacturer is gaining share in China as Japanese brands are still recovering.

 The German carmaker’s strategy to launch a fresh version of Santana and expand the Skoda brand would help it explore the less-developed Chinese cities. As per a research firm JSC Automotive Consulting, the company proposes to capture and expand further in the mainland by launching 8 revamped models, which include Skoda Octavia, Audi Q3, Santana, and Golf against GM’s new launches, which would include 3 models of Opel and the Cadillac XTS.

However, GM is not going to let Volkswagen shadow its China presence that easily. The Detroit automaker plans to add 400 more showrooms in the economy during 2013. The company’s new models, such as the luxury mid-size sedan Buick Lacrosse and luxury sports sedan Buick Regal slated for the new year, could make things tough for Volkswagen. In addition, GM is building a third manufacturing facility with joint venture partners SAIC and Wuling Motors in the mainland to augment its production capacity to 2 million units per year by 2015.

While GM and Volkswagen are contending hard to dominate the Chinese market, what are other automakers up to?

The other global giants
The Japanese automakers are putting in a lot of effort to regain their lost ground. The unfavorable environment could hurt the revenue of Toyota, Honda, Nissan and other Japan-based automakers to a great extent. Though the November 2012 sales for these cars saw some upturn, the situation still remains tough. The Chinese auto market doesn’t look that lucrative in the near term, as a sales slump remains a concern for Japanese carmakers.

However, Ford (NYSE: F) has made a lot out of the geopolitical clash between China and Japan. This Detroit carmaker is in expansion mode in the mainland and is increasing its product portfolio there. The company’s sales have been phenomenal and have hit records for three successive months. Even the recovery of Japanese car sales in November did not result in stunted sales growth for Ford cars, which enjoyed a 56% year on year sales increase. This means that consumers are taking notice of Ford cars and are finding value in them

My takeaway – China is a must watch market for automakers
Though auto sales growth has mellowed down a bit due to economic uncertainty and lower consumer confidence, China still remains a more lucrative market for automakers. For Japanese automakers, the backlash from the territorial dispute is a temporary phase that they'll recover from gradually. In the meanwhile, other automakers are making hay as China’s appetite for cars remains huge. However, automakers need to pull up their socks and get ready for fierce competition in the mainland in times to come.

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