GM to gain Chinese Market share via attrition

According to an news item just posted on Bloomberg, the fact auto sales in China are growing at the weakest pace out of the last 13 years, price pressure on smaller Chinese producers is forcing them out of the industry, creating a bull market for industry giants such as GM and Toyota Motor Corp., based on data provided by Guotai Junan Securities Co.

“If the smaller Chinese carmakers get squeezed out because of over-competition, it will be a plus for GM and other foreign automakers because they’ll be able to swoop in and take over those markets with cheaper models,” said Zhang Xin, an auto analyst with Guotai Junan in Beijing.

As the largest foreign automaker in China, GM epitomizes the gap separating large, experienced automakers and their tiny, local rivals. The company announced just this week that sales were up in the Asian country by 20 percent, the best performance in 10 months, as lower prices inflamed demand for the Wuling light truck. In contrast, local competitor Chery Automobile’s automotive deliveries sank by 30 percent to 37,446 last month, according to the China’s Passenger Car Association.

Of the 70 automakers whose performance is tracked by the China Association of Automobile Manufacturers (CAAM), the biggest 15 producers accounted for a whopping 89 percent of sales this year, with GM heading up the parade, selling over 7,000 automobiles daily just in China. That leaves all the other companies just slightly less than 10,000 potential sales per month, including 10 who have yet to sell a vehicle all year.

CAAM is expecting the number of vehicles sent to Chinese showrooms will rise from 3 to 5 percent this year, after a startling jump of 32 percent during 2010. This would be the first time since record keeping began in 1998 that the Chinese light-vehicle market would expand slower than U.S. retail sales.

“Opportunities are popping up for consolidation as overall growth slows and companies are being squeezed out by competition,” Zhang said. “But a lot of factors need to be in place for this to happen, including whether the degree of complementary manufacturing capacity available and the willingness to allow this on the local-government level.”

The central Chinese government, wants to have two to three national automakers with annual sales of over 2 million units and 4-to-5 companies with annual outputs in excess of 1 million vehicles by the start of 2012, is encouraging mergers among domestic producers.

The industry ministry has identified the auto market as one of the eight key sectors needing consolidation by 2015, according to a meeting chaired by Minister Miao Wei in July. However, some analysts think politics may get in the way of any such plans.

“Local governments are reluctant to let go of any automakers given that car companies are engines for GDP growth,” said Lin Huaibin, an analyst with IHS Global Insight in Shanghai.

China’s automobile market has doubled three times in the past decade to over 18 million vehicles sold a year with significant growth capacity remaining. Rural towns with few cars have kept the country’s average vehicle ownership at about 60 vehicles per 1,000 people, well below the industrial world average. Vehicle sales could easily reach 30 million in just eight years, according to Xu Changming, research director at the State Information Center.

This untapped demand is why foreign manufacturers are scrambling to build facilities. Volkswagen is planning a $315 million plant fir Xinjiang in 2013, filling a void in the region’s passenger-vehicle industry according to the provincial government’s planning agency. Nissan Motor Co., Japan’s second-largest carmaker, is targeting buyers in inland China, Kimiyasu Nakamura, head of the company’s Dongfeng Motor Co. venture, reportedly said last. September.

Chinese manufacturers have been forced to ramp up their marketing by the intensity of the competition. Geely sponsored the Zhejiang Symphony Orchestra’s performances in September, while Guangzhou Auto provided a fleet of 30 Trumpchi cars for the movie Racer Legend.

“There’s been a lot of pressure on us on the pricing side,” said Wu Song, general manager at China’s Guangzhou Automobile Group Motor Co. “We want to beef up awareness of our Trumpchi cars by sponsoring the movie to let people know more about us.”

If they’re learning the importance of product placement in mass media, Chinese automakers can’t be that far behind the rest.