Carmakers prepare for China deceleration

Global auto executives will notice a more sombre atmosphere when the largest car show in the world's most important automotive market opens on Monday - and not merely because, in keeping with Beijing's campaign against excess, scantily clad models have been barred from Auto Shanghai 2015.

Auto Shanghai is held biannually, alternating with the Beijing International Automotive Exhibition as the premier event for China's motor industry, the world's largest with more than 20m passenger cars sold last year.

This year's show will attract some of the world's most powerful car bosses, such as Mark Fields, Ford Motor chief executive, and Carlos Ghosn of Renault-Nissan Alliance.

China surpassed the US as the world's largest car market during the depths of the financial crisis and is, in terms of margins, the most lucrative for most major multinational car companies.

But after a series of anti-monopoly investigations last year forced most premium automotive brands to adjust their Chinese pricing practices, the global car industry is bracing itself for a "new normal" of slower economic growth, lower margins and tougher negotiations with dealers.

BMW, one of the biggest beneficiaries of China's car boom, in January agreed to pay $820m in rebates to dealers who complained that they could not meet the German automaker's sales targets, as the country's economic growth threatened to fall below 7 per cent. BMW's rivals are facing similar pressures.

"The new normal has sent some shockwaves through the industry," said Bob Grace, head of Jaguar Land Rover's China business. Over a six-year period China sales for the UK car company, a unit of India's Tata Motors, have grown from just 10,000 units to 122,000 last year.

"We can pat ourselves for some nice growth but hey, that's history. We've got to focus on the future," added Mr Grace, a 30-year JLR veteran. "Unless you've got a win-win relationship with your dealers then you're on the road to nowhere. Over the past six months we have looked at ways of adjusting some of our payment policies, some of our terms and conditions and some of our incentives to make sure the business stays as a win-win."

Compared with other major car markets, China is still in good shape. First quarter auto sales grew 9 per cent to 5.3m units over the same period last year - faster than the US, Europe or emerging markets such as Brazil.

But almost all car executives acknowledge that the trend is for slower growth, as reflected in demand figures for both passenger sedans - as opposed to more popular SUVs - and overall vehicle sales, which include buses and trucks. Annual monthly growth figures for the latter have fallen from more than 14 per cent in early 2013 to less than 4 per cent last month.

The worst hit segments include passenger sedans, down 0.4 per cent over the first three months of this year, and commercial vehicles, sales of which contracted more than 19 per cent year-on-year in March.

Norbert Reithofer, BMW's outgoing chief executive, was one of the first industry leaders this year to warn about a bumpier road ahead in China, which was largely responsible for helping him raise the German automaker's margins from the low single digits in 2009 to more than 10 per cent just two years later. BMW's units include luxury marque Rolls-Royce.

"We need to get used to single-digit growth [in China]," Mr Reithofer said in March, according to Bernstein analysts. "We used to ship cars over and they'd get bought on the spot - not any more … We only sold 14 Rolls-Royces in February. Something has clearly changed in China."

Foreign automakers, however, remain confident that demand in higher-end segments, such as premium cars and SUVs, will continue to grow at rates far above the industry average.

"We all know the new normal is a new fact in China," said Hubertus Troska, Daimler board member who oversees Mercedes Benz's China operations, at a new compact SUV plant opening this month. "But the premium segment has many more capabilities and I believe we can outperform the market in China."

Mercedes' China sales grew 28 per cent last year to 270,000 vehicles, and Mr Troska predicts that will increase to "significantly more" than 300,000 this year as the unit attempts to make up ground on rivals BMW and Audi.

Other executives point to a wealth of untapped opportunities, especially as ecommerce in the country takes off. "With Alibaba and the like here in China, the internet revolution for big ticket items is yet to happen," said Mr Grace at JLR, which recently opened an online store on Alibaba's Taobao site.

"Services, parts, accessories, insurance, used cars, body and paint repairs - all this kind of stuff is yet to show the kind of growth that's consistent with new-car market growth."

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