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Slowdown signs - Glut worsens in Chinese car market

According to China’s biggest auto dealer association, carmakers need to scale back their sales targets or sweeten incentives because the worsening glut of vehicles across the nation dealerships is unsustainable.

Mr Luo Lei deputy secretary general of the state backed China Automobile Dealers Association said average inventory carried at Chinese dealerships bloated to a level exceeding two months of sales by the end of May, compared with more than 45 days at the end of April. That's forcing dealers to deepen discounts and sell cars at a loss to meet mandatory sales targets set by automakers.

Mr Luo whose association is authorized by the central government and represents 2,100 dealership groups said “Dealers can’t shoulder the burden anymore. Their backs are broken.”

Mr Luo warning is a contrast to the jump in sales reported by automakers including General Motors Co and Honda Motor Co, which only disclose the number of vehicles sold to Chinese dealers instead of consumers. Wholesale passenger vehicle deliveries increased 12% in May.

Mr Harry Chen a Shenzhen based analyst with Guotai Junan Securities Co said “Two months of inventory is pretty dangerous for the industry. The most direct way to digest inventory is to cut prices.”

1. Shares fall

The China Association of Automobile Manufacturers which compiles the monthly wholesale figures from automakers plans to release the May numbers this week.

SAIC Motor Corp, GM Chinese partner declined 1.8% to the lowest close in more than two months in Shanghai trading. Dongfeng Motor Group Co fell 3.1% in Hong Kong while the benchmark Hang Seng Index gained 0.9%.

GM, the world largest carmaker, doesn’t share Mr Luo’s concerns. Mr Kevin Wale head of China operations predicted in a May 31 interview that the country auto industry is poised to rebound from its worst four-month slump in 14 years as consumers return to car dealerships during the second half.

He said that “I can’t see anything in the Chinese environment that’s leading to an unusual decline in consumer confidence.”

GM said this week that vehicle sales in China increased 21% last month, driven by demand for its Wuling minivan and Chevrolet models.

2. Exiting dealers

Honda reported a 92% surge from a disaster-affected May last year. Ms Wen Yuzhen a spokeswoman for Honda’s China joint venture with Guangzhou Automobile Group Co said in an emailed response on Wednesday that its dealer inventories are at “good levels”.

Ms Wen said the company has seen some dealers exiting its network lately. They had been asked to leave as they did not meet certain standards required by the company, and such dealer movements are common in the industry.

According to analyst at Mizuho Financial Group Inc the difficulties have spread to luxury-car dealers and carmakers will eventually have to share the burden of the discounts seen in showrooms.

3. Rising inventory

Ms Jerry Ma a Shanghai based spokesman for Shanghai General Motors Co didn’t answer calls to his mobile phone nor respond to an email.

M RLuo said in the showrooms, surging inventory will lead to intense price competition, forcing out weaker dealerships that can’t absorb losses. There were about 21,000 dealership outlets in China as of the end of 2011, compared with 16,000 the year before.

The association said in a previous interview on May 17 that dealerships for Honda, Chery Automobile Co, BYD Co and Geely Automobile Holdings Ltd carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts.

Source - Gulf News

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