Chinese auto market turning into buyers market at long last – discounts, free iPods and tax back deals

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From Bloomberg:

China’s appetite for cars has slowed and Zhu Dongwei, an auto salesman in the central Chinese city of Zhengzhou, is doing all he can to whet it.

Customers at Zhu’s General Motors Co. dealership get a 14 percent discount, a refund of sales tax and a chance to win a free iPod if they buy a 41,800 yuan ($6,170) Matiz compact car.

“This is our biggest promotion this year,” Zhu said. “Without discounts, many people would wait, not buy.”

Demand in the world’s largest vehicle market may drop from year-earlier levels in the second half of this year, triggering price wars as dealers compete to clear inventories, according to Credit Suisse Group AG and IHS Automotive. Wholesale passenger-car deliveries in June gained at the slowest pace in 15 months as inflation reduced buyers’ purchasing power.

“Some dealers and automakers may panic and offer the largest discounts they can,” said Yale Zhang, a Shanghai- based analyst at IHS Automotive. “If prices of daily necessities keep soaring, people’s expectations of their future financial security will be undermined, reducing their desire to buy a car.”

China’s auto sales, which have increased every month since February 2009, began growing at a slower pace in April amid rising prices for consumer goods and signs of economic cooling.

Easing GDP Growth

The government also raised the sales tax on small cars to 7.5 percent this year after cutting it in half to 5 percent last year. The tax cut helped last year’s vehicle sales surge 46 percent to 13.6 million, surpassing the U.S. for the first time.

Wholesale passenger-car sales in June grew 19 percent from a year earlier, the slowest pace in 15 months, as China’s inflation rate stood at 2.9 percent, the second- highest rate this year. The nation’s gross domestic product expansion eased to 10.3 percent in the second quarter from 11.9 percent in the preceding three months, the statistics bureau said on July 15.

“The uncertainty of the macro-economy will influence people’s confidence, leading to a slowdown in auto sales growth,” said Xu Minfeng, an analyst at Central China Securities in Shanghai. “The phasing out of some favorable policies for car buyers last year, such as the increased sales tax, has also contributed.”

Average prices of China’s locally made passenger cars fell by 2.08 percent in June from a year earlier, the biggest decline this year, according to National Development and Reform Commission.

Capacity Expansion

Even as car demand may stall, automakers including GM, Volkswagen AG, Honda Motor Co. and Nissan Motor Co. are rushing to boost capacity and introduce new models as they compete for bigger market share.

Nissan, the largest Japanese carmaker in China by sales, aims to expand production capacity in the nation 68 percent to 900,000 vehicles a year by 2012 and plans further increases after that, CEO Carlos Ghosn said in April.

The slowdown in sales growth since April “doesn’t affect our plan,” said Sharon Shen, Nissan’s Beijing-based spokeswoman.

GM’s venture SAIC-GM-Wuling Automotive Co. said last month it plans to boost capacity by 47 percent to 1.31 million vehicles annually by 2012. “We will remain aggressive in our approach to China,” said Deng Xiaoyan, a GM spokeswoman in Shanghai.

Output Exceeds Sales

Domestic auto output exceeded sales by 1.29 million vehicles in the first half of this year, the China Automotive Technology & Research Center said on July 5. The average stockpile period, a measure of the time between car production and registration, was 55 days in June, compared with 41 days in February, the center said.

“Automakers should reduce supply rather than getting into a price war,” said Zhao Hang, president of the center.

The slowdown in demand growth has left some automakers, including BYD Co. and Anhui Jianghuai Automobile Co., lagging behind their full-year sales targets.

Warren Buffett-backed BYD, which aims to double annual sales to 800,000 vehicles, met 36 percent of its goal in the first six months. Anhui Jianghuai, based in the eastern city of Hefei, achieved 31 percent of its full-year target of 300,000 passenger cars.

BYD’s share price has declined 27 percent in Hong Kong trading this year, and the carmaker said July 14 it may delay a planned share sale in Shenzhen to seek “better pricing.”

Premiums to Discounts

While carmakers’ discounts may vary based on their profit margins, price cuts of as much as 5 percent on average are likely, IHS’s Zhang said. Imported vehicles carry higher price tags and may be subject to steeper cuts, he said.

“Automakers and dealers in China aren’t enjoying the good life like last year,” said Guo Yong, a manager at Beijing Asia Games Village Automobile Exchange, a market that includes 130 vehicle dealers. Sales outlets are offering 7 percent to 8 percent discounts on vehicles with sticker prices between 110,000 yuan and 120,000 yuan, he said.

By contrast, some customers in Beijing paid a 20,000 yuan premium to skip ahead of a waiting list for Toyota Motor Corp.’s RAV4 sport-utility vehicles in February, according to Wu Bin, a salesman with Beijing Guangshun Toyota Sales Co.

The dealership had to stop charging the premium and cut the vehicle’s price in March when sales declined amid global recalls of Toyota models, and is now offering a 5,000 yuan discount, according to Wu.

“With the discounts, sales have started to recover,” Wu said.