China's sputtering market sends alarm bells far and wide
China has gone from growth engine to source of concern for carmakers, with BMW AG and Toyota Motor Corp. becoming the latest to warn about the world's biggest auto market slowing down.
"Things may well get worse from here," Max Warburton, an analyst at Sanford C. Bernstein Ltd., said in a note to investors this week. "The market continues to deteriorate."
Carmakers are struggling to adjust to what BMW has called a "normalization" of a market that has grown eightfold since 2000, pushing it past the U.S. as the world's biggest car market in 2009.
Automakers including Ford Motor Co. and Volkswagen AG built factories in response. Ford now sees a potential annual decline in industrywide sales in China for the first time in 17 years. Volkswagen's deliveries in the country dropped for the first time in a decade in the first half.
For BMW, the lucrative new market drove profit from auto production, as a percent of sales, into "solid double-digit territory," Warburton said. The Chinese contraction probably contributed to BMW's 8.4 percent profit margin lagging behind those of competitors Audi and Mercedes-Benz and falling short of investor expectations, Warburton said.
BMW's sales in China slipped 0.1 percent in June, as the new-car market dropped for the first time in more than two years. The automaker said Tuesday it has cut production in China so far this year by 16,000 cars. Still, the Munich-based company emphasized the market's long-term potential.
"We experience that volatility in all emerging markets," BMW Chief Executive Officer Harald Krueger said on a conference call with reporters. The country is still a growth market, especially for luxury-car makers, Krueger said.
Toyota said pricing has been deteriorating in China, sapping optimism for profitability there even as it's posted a 12 percent percent gain in deliveries in the first seven months of this year. The stock fell as much as 3.2 percent in Tokyo trading.
"The sales expenses have gone up and also the sales prices have come down slightly," Tetsuya Otake, a Toyota managing officer, told reporters in Tokyo on Tuesday, after the company posted quarterly operating profit that missed analyst estimates. "This is making our business in China quite difficult. The business environment is getting tougher."
Toyota said it will begin production of another new assembly line in Tianjin, China, by mid-2018. While that expansion will allow the company to make another 100,000 vehicles per year, this will be mostly offset by ending output on an existing assembly line in China.
Japanese carmakers have outpaced the industry this year, though that lead is under threat of what the Japan Automobile Manufacturers Association sees as a "downward spiral" in demand.
What seems certain is that the double-digit increases that have underpinned automaker expansion won't return, said Peter Fuss, a partner at consulting company EY's German unit.
"We're unlikely to get double-digit growth again but something that's more realistic for a market of China's size and potential," Fuss said. "That would mean growth rates of more than 5 percent to as much as 8 percent."