Weak demand drags on Chinese carmakers, earnings growth stalls

Reuters Middle East

BEIJING, Aug 22 (Reuters) - Chinese automakers have had

their toughest first half since the global financial crisis and

the rest of this year looks set to be tougher still as the

world's largest auto market sputters in a slowing economy.

State auto groups with strong foreign ties, such as domestic

champion SAIC Motor Corp, can still deliver earnings

growth, but others may find themselves locked in reverse gear,

industry observers say.

"This is a tough year for all automakers, large or small.

2011 wasn't so good either because (government stimulus)

incentives were gone, but it's much worse now as the economy is

not doing so well," said Zhang Xin, an analyst at Guotai Junan

Securities. "It's like a double whammy."

China's economy grew at its slowest pace in more than three

years in the second quarter as demand at home and abroad

slackened, confirming a downtrend that has full-year growth on

course for its weakest in 13 years.

The China Association of Automobile Manufacturers is keeping

to its forecast for a 5-8 percent rise in overall vehicle sales

this year - a far cry from explosive growth of 46 percent and 32

percent in 2009 and 2010 respectively. January-July total

vehicle sales rose just 3.6 percent after anemic growth of 2.5

percent in 2011, setting China up for its slowest back-to-back

years of growth since the late 1990s.

Life for China's local brands is tough.

Geely Automobile Holdings Ltd, which reports

half-year earnings later on Wednesday, and Great Wall Motor Co

Ltd should hold up better than most as they

have expanding export businesses, analysts say.

But Warren Buffett-backed BYD has

warned of a more than 50 percent slump in its January-June

earnings, blaming weak car sales and continuous losses in its

solar energy business. The safety of its electric car was also

called into question after an e6 taxi caught fire in a fatal

accident in May even though a probe showed the lithium-ion

phosphate battery that powers the car did not explode after the

collision.

And FAW Car has predicted it could swing to as

much as a 75 million yuan ($11.8 million) first-half net loss.

SAIC, which makes cars in China in partnership with General

Motors and Volkswagen AG, the two largest

foreign automakers in the market, could still achieve

double-digit earnings growth in the second quarter, according to

forecasts by three analysts - still a far cry from recent growth

spurred by Beijing's stimulus measures. Earnings jumped by

around a quarter last year when the Chinese economy appeared

largely immune from the debt crisis seizing Europe.

Net income at Dongfeng Motor Group Co - which

makes cars in partnership with Nissan Motor, Honda

Motor and PSA Peugeot Citroen - is seen flat

in the first half as it is exposed to a steep downturn in heavy

truck sales.

Geely is the second-best performer in the sector this year

among 53 large- and mid-cap autos firms globally, with its share

price rising 62 percent, Thomson Reuters StarMine data shows.

Chinese automakers crowd the list of losers in the global auto

sector, with shares in BYD, Dongfeng, SAIC and Brilliance China

among the worst performers so far this year.

LUXURY PRICE WAR

Even the popular German luxury brands have resorted to a

price war this year as they look to hit ambitious sales targets

in China - a move that may further cannibalize the sales and

earnings of mass-market marques.

Buyers can drive home a brand new Toyota Corolla for 131,800

yuan, more than a third cheaper than two years ago. A Buick

Excelle, ranked fourth on China's top selling list, can be had

for just 76,900 yuan, after a 23 percent discount, according to

cheshi.com, an industry website that tracks prices at more than

3,000 dealerships across China.

Both Toyota Motor and Nissan saw sales in China

decline last month, and Changan Automobile Co

blamed an estimated 44-49 percent drop in its

first-half earnings on a smaller contribution from its car

venture with Ford Motor and Mazda Motor.

"There are lots of uncertainties ahead," said John Zeng,

Asia Pacific director for industry consultancy LMC Automotive.

"The euro zone could continue to drag on the economy ... and the

auto market could slow further if more cities start to restrict

car sales."

Guangzhou's city government last month joined Shanghai,

Beijing and Guiyang in capping car sales in an effort to ease

chronic traffic congestion and pollution. Xian,

an inland city in the northwest, was forced to back down from a

similar move after a public outcry. Other cities said to have at

least considered restricting car sales include Chengdu, Hangzhou

and Dalian.

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