China auto sales drop as industry growth stalls

Is this the big stall automakers have been worried about?

China's Association of Automobile Manufacturers said Friday that industry sales dropped 2.3 percent in June compared with last year. It's the first year-over-year decline in monthly auto sales in more than two years in China, which is the world's largest auto market.

People walk near a Ford Taurus sedan displayed at a media event ahead of the 16th Shanghai International Automobile Industry Exhibition, April 18, 2015.
Tomohiro Ohsumi | Bloomberg | Getty Images
People walk near a Ford Taurus sedan displayed at a media event ahead of the 16th Shanghai International Automobile Industry Exhibition, April 18, 2015.

"We've clearly hit an inflection point in sales," said James Chao, China-based analyst with IHS Automotive. "What we're seeing is a huge change over the last couple of years."

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Last year, auto sales in China climbed 9.9 percent to almost 20 million vehicles. Following June's sales drop, the manufacturers association has lowered its estimate for sales growth this year, from an increase of 7 percent to an increase of 3 percent.

There are several reasons why Chinese consumers are thinking twice before buying a new car or SUV. For one, the plunge in China's stock markets and falling consumer confidence have caused uncertainty in the economy.

For another, laws in large cities restricting vehicle registrations—an effort to ease congestion—mean some families are opting to own just one vehicle. And uncertainty about prices may be prompting consumers to wait before buying.

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"Some big players in the industry, including Volkswagen, announced price cuts for some vehicles, and when that happens in China consumers expect even more discounting," Chao said. "So consumers are waiting for that next leg down in pricing."

China auto sales shows signs of stalling
China auto sales shows signs of stalling   

Volkswagen and General Motors are the two largest automakers in China. While all foreign automakers must share profits in the country with partner Chinese manufacturers, sales there are still a big contributor to their bottom lines.

GM reported $2.1 billion in equity income in China last year. That was a major factor in the automaker's full-year net income of $2.8 billion. Two weeks ago, GM CEO Mary Barra said she's confident her company can continue to expand sales even as China's auto demand slows down.

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"We still see an opportunity," she said. "When you look at what we have with Chevrolet and more SUVs coming and when you look at Cadillac, we're seeing some real momentum there."

Chao said GM is in better shape than other foreign automakers in China, mainly because its joint venture to sell lower-cost SUVs and cars in Western China is doing relatively well.

Western China, hours from Shanghai and Beijing, has been a bright spot for automakers because sales in that part of the country have not hit a saturation point, as they have in larger metropolitan areas in eastern China.

The inner China market has been a key to Ford's expanded sales figures in recent years, though its business in China has also stalled with sales flat in the first half of this year.

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Correction: This story has been updated to reflect the proper company for James Chao.