Dwindling Demand Fuels Car Inventory Build-Up 中国汽车库存增加或引发价格战

By newsdoug on June 7, 2012

It’s the beginning of June, and that means it’s time for the nation’s automakers to release their monthly sales data that will undoubtedly show modest to moderate growth, with the possible exception of some domestic automakers that are suffering in the industry’s current slowdown. But the real picture could be far worse than those reports indicate, based on the latest cautionary words from the nation’s biggest association of auto dealers. Those words of caution from the China Automobile Dealers Association come less than a month after the group warned that inventories of unsold cars were rising above what is normally considered healthy levels at dealerships selling 3 of the nation’s top brands, Geely (HKEx: 175), Chery and BYD (HKEx: 1211; Shenzhen: 002594), as well as at Honda (Tokyo: 7267) dealerships. (previous post) That warning reflected the reality that auto manufacturers, whose monthly figures usually reflect shipments to dealers and not actual sales, were sending many more cars to their dealerships than the dealers were actually selling. The slowdown has gripped the entire market for much of the last 12 months, as car sales dropped off considerably after turbocharged growth in 2009 and 2010 fueled by incentives from Beijing. Now the same Auto Dealers Association is saying that inventory levels are rising at an alarming level, with the average level now at 60 days at the end of May compared with 45 days just a month earlier. (English article) An association executive said the rapid rise in unsold cars is unsustainable, and that dealers are being forced to sell vehicles at big discounts to prevent inventory levels from getting even higher. Most observers are expecting to see modest gains tomorrow when the association that tracks China automobile sales releases its monthly figures for May, which reflect shipments to dealerships. Some individual manufacturers have already reported their own May figures, including GM (NYSE: GM), which reported its May sales rose 21 percent on strength from 2 of its lower-end brands. While GM’s numbers may be relatively reliable, the same may not be true for some of China’s domestic players like Geely, BYD and Chery, which have continued to churn out new cars and ship them to dealers who then discover there is little or no demand for the product. Analysts are already predicting the inventory build-up will force those dealers to offer steep discounts, leading to price wars that could ultimately infect not only the domestic automakers but also the big global players like GM and Volkswagen (Frankfurt: VOWG) as well. Dealers are also likely to feel the pinch, with many potentially being forced out of business as they are forced to sell their inventory at a loss. On the whole, it looks automakers and their dealers could be facing a bloody summer ahead, with many of the domestic players being forced to idle large amounts of production capacity by the fall.

Bottom line: An unsustainable inventory build up at Chinese auto dealers will lead to bloody price wars in the summer, followed by sharp reductions in output for many domestic players in the fall.

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