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Slowing market gains after rapid expansion lead to subdued tone at Beijing motor show

BEIJING -- After years of trumpeting their advance in China, global car makers are now sounding a more cautious note over the world's largest auto market.

While they expect the market to continue growing, albeit at a slower pace, auto executives gathering at the Beijing motor show admit that risks are increasing. Car prices are dropping, sales growth is sliding and the government is getting stricter on emissions regulation.

Toyota Motor Corp. said it is uncertain about hitting a target it set itself two years ago to sell two million cars in China by 2025. "Since then we've seen additional requirements coming up for fuel efficiency and emissions on the regulator side," said Hiroji Onishi, head of Toyota's China region. "We are reconsidering our product lineup and trying to come up with a plan that will enable us to secure the volumes and profit as well."

Four years ago Ford Motor Co. unveiled an ambitious plan to double its production capacity in China by 2015. This year there is "nothing that we're ready to talk about" in terms of further expansion, said Mark Fields, chief executive of the Dearborn, Mich.-based manufacturer.

And Volkswagen AG last year said with fanfare that it would invest 22 billion euros ($24.7 billion) in China in the coming five years and raise production capacity by 40% to five million cars.

"We are generally staying on the plans, although some things are coming a little bit later," said Jochem Heizmann, chief executive and president of Volkswagen AG in China.

The shift in tone emphasizes that the easy times are over in the Chinese auto market. Global auto makers have been some of the biggest beneficiaries of Chinese consumers' appetite to spend. Booming double-digit percentage growth was common for global auto makers in the last decade in China.

However, as China's economic growth cools, industries ranging from coal, steel to shipping have been struggling with insufficient demand. In the first quarter of 2016, auto sales rose just 6% from a year earlier.

The single-digit percentage gain came even as China cut by half a purchase tax on small-engine vehicles, which make up more than two thirds of the country's new car sales. Analysts have cautioned that demand for those vehicles could stall after the policy expires at the end of this year. Volkswagen's Mr. Heizmann warned that the tax break's scheduled expiration will have a "negative" impact on the industry next year.

Ford expects China will sell a total of 23.5 million to 25.5 million vehicles this year, up 3.7% on 2015. Toyota said it is aiming to sell 1.15 million cars in China this year, largely unchanged from the volumes it sold last year. General Motors Co. has forecast low-single-digit market growth each year up to 2020.

Global auto makers are particularly sensitive to slowing Chinese growth because they derive a significant amount of their revenue from the country, after years of aggressive expansion. China accounts for 37% of GM's global vehicle sales, 36% of Volkswagen's, and 17% of Ford's, according to corporate filings.

The companies have built more plants in China than anywhere else since 2008. Now they could be confronted with too many factories and not enough buyers.

One of GM's joint ventures in China -- Beijing requires foreign companies to build cars with local partners -- saw its utilization rate fall to 113% last year from 137% the year before. Over the same period one of Volkswagen's joint ventures saw its rate fall to 115% from 132%, according to their partners' financial statements. Car makers reap profits if their factories run near 100% of capacity, but losses mount if the utilization rate falls below 80%.

Ford's top executives said by the end of this year it would have a manufacturing capacity of 2.1 million vehicles in China, almost double its sales volumes last year in the country. Citing fierce competition, John Lawler, chief executive of Ford China, said China is starting to look like "a mature market."

As car prices remain under pressure, global auto makers said they would focus more on profitability than sales volumes. According to a research by Sanford C. Bernstein, combined pretax profits posted by China's major car makers fell 1.1% year-over-year in 2015.

"Sales performance is not our only target," said Mr. Heizmann. "We are not following every price reduction. We have to take into account the long-term profitability as well as the interest of our customers."

Ford chief executive Mr. Fields sounded a similar note. "Running a profitable business takes higher priority than blindly going after a sales target or market share," he said.

--Rose Yu

(END) Dow Jones Newswires

April 26, 2016 02:49 ET (06:49 GMT)

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