By William Boston 

BERLIN--At BMW AG's annual results presentation in March, former Chief Executive Norbert Reithofer warned of a coming slowdown in China. On Thursday his prediction seems optimistic.

China's car market has stalled. New car prices are tumbling and new car sales have fallen two months in a row, hitting the profits and share prices of the auto makers most dependent on the world's largest car market by sales.

German car makers were the biggest winners during China's past decade of explosive growth. As a new middle class emerged in China, ordinary Chinese traded their bicycles and scooters for sporty BMW, Mercedes-Benz, Audi and Porsche premium cars.

Today, the Germans are the largest foreign manufacturers in the Chinese auto market, supplying nearly every fourth new car sold. The Germans produced almost four million cars in China last year, seven times more than a decade ago. German auto output in China has increased 29% a year on average since 2005, and even kept growing at the peak of the financial crisis.

But China's slowing economy, a government crackdown on corruption, restrictions on car ownership to improve urban air quality and currency devaluation that has made imported premium cars more expensive are putting the brakes on new car sales and forcing car companies to cut prices.

"The result is that profits in China are falling significantly," said Porsche Chief Finance Officer Lutz Meschke in a recent interview. "They are falling now and they will continue to fall significantly in the future."

The German auto industry's dependence on China for a large share of sales and profits now threatens to make it the biggest loser, as slow growth becomes the new normal in China. As a result, China angst among investors is hitting the shares of Volkswagen AG and BMW AG, the two German automotive groups most exposed to the Chinese auto market.

BMW shares have fallen 34% since peaking at EUR123 on March 16, two days before Mr. Reithofer warned of a slowdown. Volkswagen shares peaked at EUR255 the same day, and have also fallen 34% since. Shares of both companies are down more than 8% so far this year, while the broader DAX index of German blue chips is up more than 7%.

The slowdown is affecting auto makers significantly on two fronts. Reluctance of consumers to commit to new car purchases is increasing competition, putting pressure on prices. Slowing sales also means dealers are moving fewer cars out of the showrooms, causing inventories to rise and forcing manufacturers to curb production of new cars and lower capacity usage at their factories in China.

Earlier this year, for example, Porsche slashed the price of its Panamera as much as 20% in China, said Mr. Meschke.

Audi, the top-selling premium brand in China, cut production in its Changchun plant by 4% in the first half of the year to adapt to weaker demand in China for its A4 and A6 sedans and the Q3 and Q5 sport-utility vehicles, according to Audi's financial report.

Long-term, investors and auto executives say, China's economy and its auto markets will continue to grow. The main driver of future new car sales in China will remain the expansion of the middle class.

Most of China's growth has taken place in the largest cities. In the future, growth is expected to come from the midsize and smaller cities where car ownership remains rare. As incomes in those areas increase, analysts say, people will buy cars.

"China's short-term development over the coming months is harder to predict," BMW Chief Finance Officer Friedrich Eichiner told reporters earlier this month. "We are currently adjusting production to match slower growth, and reducing retail inventory."

Earnings reports by the German auto makers show that profits from China fell considerably in the first half of this year.

Volkswagen AG, the biggest foreign manufacturer in China, had seen profit from its China operations grow by double-digits each year during the past decade, from just over EUR100 million. Its profit from China rose 21% last year, to EUR5.2 billion.

But Volkswagen's business in China slowed considerably in the first six months of this year. Sales in China across all of its brands fell 5.3%, to 1.99 million vehicles, driving up inventories at its dealerships and plants. Pretax profit from China was EUR2.74 billion, up just 5% from the previous year.

Volkswagen's Audi luxury unit referred to the "formerly booming market of China" in its half-year earnings presentation last month. Axel Strotbek, Audi's CFO, cited weaker earnings from China as a reason for a 45% drop in the company's financial result. The company doesn't consolidate its earnings from China, but books profit from its Chinese joint venture as a capital gain.

BMW doesn't report the profit its Chinese joint venture, BMW Brilliance Automotive, but its partner, Brilliance China Automotive Holdings Ltd., said in July that first-half profit would fall 40% as a result of weaker BMW sales.

Daimler AG, which owns luxury car maker Mercedes-Benz, continues to buck the trend in China. Sales of Mercedes-Benz cars in China rose 29% to 178,578 vehicles in the first half of the year, Daimler said.

Mercedes is a relative latecomer to China and still significantly trails rivals Audi and BMW. Audi's sales in China rose 2% to 273,853 in the first half of the year. BMW sales, including its Rolls-Royce and MINI brands, rose 2% to 230,788 vehicles.

"We're still in catch-up mode in China," Daimler's China chief Hubertus Troska said this week. "Our position in this market is still not where we are in any other markets."

Write to William Boston at william.boston@wsj.com

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(END) Dow Jones Newswires

August 27, 2015 10:17 ET (14:17 GMT)