China’s Hold on Auto Industry Tightens

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As if China wasn’t already important enough in the global auto market, the country now sells more cars than all of Europe combined. After overtaking the U.S. in 2009, the China Passenger Car Association reported last week that 2012 sales rose nearly 7% from the year before to hit 14.68 million compared to 14.5 million in the U.S., which recorded its strongest sales growth in four years, and 12.5 million in Europe, which saw a 1.1 million year-over-year decline.

Accordingly, we noted late last month that December auto sales in China would be critical to projecting both 2012 earnings and 2013 expectations for the world’s leading car companies. And, as expected, December was another huge month for the market. Sales rose 8.6% from a year earlier, and this continuing strength drove observers to project growth in 2013 will be as good or perhaps even slightly better than in 2012.

With end of year results now in, we’re able to parse the winners and losers.

Recent trends continue in December

Most leading automakers saw the winning streak they’ve been on for months roll into December. General Motors (NYSE: GM) and its joint ventures sold 23% more units than in December 2011, helping it claim the top spot among all foreign automakers for the eighth consecutive year. Volkswagen, which unlike GM includes Hong Kong in these figures, sold 24% more in China to hang on to the number-two position. Ford (NYSE: F), a relative newcomer, continued to increase market share with sales up 43% from the previous December. And Bayerische Motoren Werke’s combined sales of BMW, Rolls-Royce and Mini brands rose even more, up 73% from the year earlier.

Conversely, sales by Japanese carmakers remained in a funk as a territorial dispute that led to a boycott of goods from that country softened but did not dissipate. Nissan Motor, the largest Japanese automaker in China, reported sales down 24% in December following drops of 30% in November and 41% in October. Honda Motor ) sales were down 19%, Toyota (NYSE: TM) fell 16% and Mazda Motor slumped 26% all smaller declines than those in prior months, but all still significant. In fact, while the combined share of China passenger car sales among Japanese manufacturers rose slightly through the fall it remains far below the level at the end of 2011.

Luxury market still top shelf

While some fear China’s very active and highly profitable luxury market could weaken as new leaders put measures into place designed to curb excess and corruption among the upper classes, demand in this category remained strong. Volkswagen’s Audi brand is still the country’s luxury leader with 405,838 vehicles sold in 2012, an increase of 30% from the year before. BMW, while growing faster, remains in second place with total sales up 40% from 2011 to 322,444 units. Number-three Daimler notched a record with 206,150 sales last year, but saw its growth slowing with a year-over-year increase of just 4%.

The market’s strong and, so far, relatively steady performance has made China an increasingly critical territory for other luxury automakers as well. Jaguar Land Rover, for example, says China became its top global market in 2012 as sales rose 74% to 73,347 units. So, to keep pace, most players are upping their efforts. One is GM, which saw Cadillac sales remain basically flat year-over-year at around 30,000 units and will try to gain share by introducing its second locally produced model in the next few months. Another is Volvo, whose sales fell 24% in December and 11% for the year and subsequently unveiled plans to introduce a new luxury model while boosting its retail network and marketing efforts.

Lower-end models booming too

While the high-end market becomes increasingly competitive and is threatened with other internal pressures, the appeal of less pricey, family-oriented and more fuel-efficient models continues to grow. For example, sales of minivans produced domestically by a GM joint venture rose 12% in 2012 to 1.33 million units and now accounts for almost half the company’s total China sales. The Mercedes-Benz GLK-class mid-size SUV helped the company buck other downward trends and was its top performer here percentage-wise in 2012 with 27% growth. And while Ford remains a smaller player in the country, it has been growing very fast  particularly in the wake of the Japanese decline and its total 2012 sales were up 21% to 626,616 units. Sales of its locally built Mondeo, Focus, Fiesta and S-Max models, in addition to the imported Edge, rose 59% year-over-year in December.

Bottom line

No one doubts that China’s auto market will continue expanding over the long term, with sales ultimately passing those in the U.S. and Europe combined. It’s true that the pace will likely slow from the heady levels recorded over the past several years, and some submarkets and geographies may weaken due to various government policies. But even the short-term still looks promising, with some projecting total sales will top 20 million units as soon as this year.

Car makers that have entrenched themselves here with models that address domestic demand, formed joint ventures able to offer attractive but less expensive alternatives that still leverage their well-known brands, and developed a sales and marketing infrastructure that reaches out beyond the biggest cities and wealthiest customers, should see benefits in 2013 and for years to come.

Fool blogger Howard Rothman does not own shares in any of the companies mentioned in this entry. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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