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China No Longer Easy Bet as BMW, Honda Cut Vehicle Prices

Bloomberg logoBloomberg 4/21/2015 Bloomberg News
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(Bloomberg) -- China used to be the no-brainer market for automakers, with rising incomes creating millions of first-time buyers. That view is under siege, with carmakers cutting prices and output as the industry scales back growth forecasts.

Bayerische Motoren Werke AG will reduce output this quarter and has lowered prices on some models to adjust to the “new normal,” Karsten Engel, the company’s China chief, said at this week’s Shanghai auto show. Vehicle sales in China this year may rise by less than the 7 percent projected in January, the China Association of Automobile Manufacturers said Tuesday, without making a new forecast.

The Shanghai show will be marked by discussions about further price cuts and arguments with dealers about sales targets as growth slows, while putting on a brave front to media, Sanford C. Bernstein & Co. said in a report Monday. At the same exhibition two years ago, the talk was about multibillion-dollar expansion plans.

“China is the single most important determinant of auto industry earnings,” Max Warburton, senior analyst at Sanford C. Bernstein, wrote in the report. “BMW is the only OEM to have warned explicitly about China so far, but we expect others to follow.”

Ford Motor Co., which is spending $4.9 billion to double manufacturing capacity there, is seeing some pricing pressure, Chief Executive Officer Mark Fields said at the show.

Construction Binge

Rising incomes and low ownership rates helped make China the largest auto market in the world in 2009, surpassing the U.S. at a time when the American economy was mired in recession. With Europe also in the doldrums and Japan facing a shrinking population, global automakers looked to China as a source of growth.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins in what remains one of the world’s most profitable vehicle markets. Global automakers are under pressure to cut prices as Chinese brands grab market share by offering cheap SUVs.

The China Association of Automobile Manufacturers projects China’s vehicle sales will grow by an average of about 5 percent to 10 percent a year, after increasing by an average of 24 percent from 2001 to 2010, as the economy slows and more cities impose restrictions on vehicle registrations.

“Even though we don’t like it, it will become a new norm that more cities will start limiting vehicle purchases every year,” Dong Yang, secretary general of the group, said Tuesday at a conference in Shanghai. He said the group will give a revised forecast later this year.

Volkswagen Forecast

VW won’t beat industry sales growth this year because it’s missing out on a surge in demand for budget-priced sport-utility vehicles and minivans, Jochem Heizmann, the automaker’s China chief, said Sunday before the association’s comments.

Mass-market brands have been affected by the increasing number of cities putting in place registration caps to combat pollution, while a campaign against corruption and extravagance has crimped sales of luxury cars.

“We tended to talk about China as an emerging market, and what we’re seeing now are actions in the marketplace which are more like a developed market,” Ford’s Fields told reporters on the sidelines of the show Monday.

Honda Discounts

Honda Motor Co. is feeling the most pressure to trim prices in the mid-size sedan segment and offering discounts of about 5 percent, said Seiji Kuraishi, chief of the company’s China unit. Toyota Motor Corp.’s Lexus brand is cutting prices by about 7 percent, though the reductions vary by model, said Tetsuya Ezumi, executive vice president for China.

A price war among companies will become the norm in China, according to BAIC Motor Corp., which has joint-venture partnerships with Hyundai Motor Co. and Daimler AG.

“It’s like walking on a single-plank bridge,” Liu Yu, the head of BAIC’s sales unit, said in an interview. “Fights will go on until the end.”

BMW Cutting Production, Prices in China to Adapt to ‘New Normal’ VW China Chief Says Automaker Won’t Beat Market Growth This Year China Automakers Are Winning the World’s Hottest SUV Market Top Stories: TOP Top transport news: TRNT China auto news: TNI CHINA AUT Bloomberg Intelligence auto analysis: {BI AUTM

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