China’s Car Dealerships Struggle as Stockpiles Increase – time to look Beyond The BRICS?

Although BRICS have still have massive expansion potential, entering those countries today is fraught with additional risk and the rewards for direct investors may be more elusive than ever.

Last week’s sold out What Lies Beyond the BRICS event produced by the Princeton council on World Affairs and Fluent In Foreign LLC., examined whether the time to invest in the booming BRICS markets has passed and may be it’s time to look at the next wave of emerging smaller markets around the globe.

China’s Car Dealerships Struggle as Stockpiles Increase

Bloomberg News, May 18th, 2012

Chinese dealers are struggling with the rising number of unsold cars that’s threatening to deepen price cuts, according to the nation’s biggest automobile dealers’ association.

Dealerships for Honda Motor Co. (7267), Chery Automobile Co., BYD Co. (002594) and Geely (175) Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, Su Hui, vice president of the auto market division at the state-backed China Automobile Dealers Association, said in an interview yesterday.

“Unsold cars are crowding dealer lots in cities from Guangzhou in the south to Xi’an to the west,” Su said in a phone interview yesterday from Beijing. “It’s like a contagious disease that will spread.”

The warning signals that vehicle deliveries reported by companies, which have risen more than analysts’ estimates for the past two months, aren’t fully translating to consumer sales. Demand was the slowest in the first four months since 1998, weighing on automakers from General Motors Co. (GM) to Volkswagen AG (VOW), which are counting on the world’s largest auto market to offset slumping sales in Europe.

Intensifying Competition

“Competition will get fiercer,” said Huang Wenlong, a Hong Kong-based analyst with BOC International Holdings Ltd. “China’s auto demand will definitely slow down with the decline of the economic growth rate.”

BYD (1211) fell 4 percent to HK$15.22 at the midday trading break in Hong Kong, poised for its lowest close since Oct. 24, after earlier dropping as much as 5.4 percent. Geely dropped as much as 3.4 percent and Guangzhou Automobile Group Co. (2238), which makes cars with Honda, fell as much as 2.7 percent.

An increasing number of small-scale dealers are suffering losses after discounting cars to boost sales, according to Feng Jian, deputy general manager of Pang Da Automobile Trade Co. (601258), China’s second-largest auto dealer by market value. Competition is also leading to consolidation among dealers, Feng said.

China Yongda Automobiles Services Holdings Ltd., a Shanghai-based car retailer, plans to raise as much as HK$3.4 billion ($433 million) from an initial public offering in Hong Kong and plans to use 35 percent of the proceeds on potential acquisitions.

Recommendation Cut

Honda’s joint venture factory in China shut down for more than two weeks for the Labor Day public holiday and line maintenance, according to the Tokyo-based automaker. The stoppage prompted CLSA Asia Pacific Markets to cut its recommendation on Honda’s partner, Guangzhou Automobile, citing worsening demand.

“While we had expected a poor first half, we did not expect to see the market deteriorate so fast that the Honda JV needed to close the factory for 16 days,” Scott Laprise, Beijing-based analyst at CLSA, said in a May 11 report.

Honda President Takanobu Ito said yesterday in Tokyo that he wasn’t too concerned about China because the market still has room to expand. Executive Vice President Tetsuo Iwamura said at the same event the automaker’s inventory levels in China are appropriate and “aren’t too big of an issue yet.”

CLSA this month also lowered its recommendations on Dongfeng Motor Group Co. and Great Wall Motor Co. (2333), citing worsening prospects for sedan makers.

China ZhengTong Auto Services Holdings Ltd. (1728) and Baoxin Auto Group Ltd., Chinese luxury auto dealers, canceled plans to sell dollar-denominated bonds on May 16 as yields on Chinese debt in the U.S. currency surged the most since September.

Vehicle Sales

China’s total vehicle sales declined 1.3 percent in the January-to-April period, the worst showing since 1998 when deliveries fell 1.6 percent, according to data compiled by the China Association of Automobile Manufacturers, as slowing economic growth and rising fuel prices dented consumer demand.

GM, the world’s largest automaker, reported sales growth accelerated last month as demand for its Wuling minivans offset a drop in Chevrolet deliveries. While Wuling helped total growth quicken to 12 percent from 11 percent in March, Buick sales growth slowed to 1.7 percent from a year earlier and demand for Chevrolet vehicles shrank 6.2 percent.

Inventory levels at automakers rose 3.3 percent to 757,400 units as of the end of April, the highest in at least 16 months, CAAM data show. Dealerships are holding at least the equivalent in stock, according to Cheng Xiaodong, who oversees auto price monitoring at the National Development and Reform Commission, the nation’s top economic planner.

The monthly NDRC survey of 36 major Chinese cities showed average car prices fell 1.9 percent in April from a year earlier, a fourth straight decline this year.

‘Big Pressure’

“There’s pretty big pressure on auto dealers and automakers to cut prices,” said NDRC’s Cheng. “Car demand is not rigid and is easily undermined by macroeconomic conditions and the cost of owning cars.”

Pacific Investment Management Co., which oversees the world’s largest bond fund, said this month that China’s economic growth may slow to the “mid-7 percent range,” a pace unseen since 1999. Economists at Citigroup Inc. and JPMorgan Chase & Co. cut their estimates for China’s economic expansion after April industrial production and trade grew less than estimated and renewed European debt turmoil roiled markets, prompting authorities on May 12 to cut the reserve ratio for the third time in six months.

Steeper discounts bode well for consumers shopping for their next drive.

“The auto consumer is becoming very price sensitive and appears to be buying only if there is a good deal,” said Ole Hui, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “Pricing is definitely on a structural downtrend.”

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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