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October 25, 2018 12:00 AM, EDT

China Growth Engine for World’s Carmakers Now a Liability

Cars in traffic David Paul Morris/Bloomberg News

The chief engine of growth for the world’s carmakers is turning into their biggest headache.

From Oct. 23 to Oct. 25, auto giants from Volkswagen AG and Ford Motor Co. to Renault SA and PSA Group have pinned flagging profits and weakening sales outlooks on a slowdown in the world’s largest auto market. The companies spent billions of dollars over the past two decades setting up production and sales channels in China as rapid growth saw millions buy first — and second — cars, only to see demand fizzle as the economy wavers.

The trade war with the United States and a sliding stock market are damping prospects for the $12 trillion economy and hitting consumer demand. Shoppers are staying away from car showrooms, with monthly sales sliding for four straight months, on track for their first annual contraction in at least two decades. Few of the major car manufacturers that rushed into China wanting to cater to its 1.4 billion people have been spared.

The trend also forebodes a massive shift in consumer preferences toward ride-hailing and car-sharing services, which are undermining the need for individuals to own a car, said Bill Russo, a former Chrysler executive who now heads auto consultant Gao Feng Advisory.

China car demand graph

“Mobility demand is increasing as China continues to urbanize,” Russo said. “However, traditional carmakers are not positioned to capture this demand growth.”

Shared autos used by popular ride services such as Didi Chuxing will account for 30% of China’s passenger vehicles and majority of miles traveled by 2025, Russo predicts. They currently account for 13% of passenger vehicles. The increased usage of such cars will reduce the unit sales of new vehicles, Russo said.

Forecasts Slashed

Volkswagen warned that trade tensions are dragging down the Chinese market, prompting the German manufacturer to cut its sales forecast. The company had forecast industrywide growth of 4% this year in China, but recent data show the market to be flat or even lower for the year, the company said. China is the carmaker’s most important market, accounting for just less than 40% of its vehicle sales.

The trade war already had already prompted luxury carmakers BMW AG and Daimler AG to warn about lower profits, while slowing China demand forced Jaguar Land Rover to shut a factory temporarily. Mercedes-Benz maker Daimler on Oct. 24 said it still expected “good growth rates” in its most important market, Chief Financial Officer Bodo Uebber told reporters in a quarterly earnings call. China accounted for 29% of deliveries through September, rising 13%.

We [Ford] definitely see a weaker market.

Jim Farley, Ford’s president of global markets

Jim Farley

As part of the economic standoff with the United States, China increased the levy on vehicles imported from America to 40%. The country almost simultaneously lowered the duty on other imported cars to 15%, leaving consumers confused about pricing and potentially lowering demand, an industry group said.

Ford continued to post losses in China in its latest quarter, saying demand was hurt by the country removing purchase incentives. A rebate on purchase tax that was in place through last year was phased out, and other hurdles such as rising property prices also are weighing on auto demand, a Chinese industry group said this month.

“We definitely see a weaker market,” Jim Farley, Ford’s president of global markets, said on an earnings call Oct. 24. The removal of incentives led to a hangover in the first quarter, and demand hasn’t recovered to year-earlier levels since, he said.

French contenders Renault and PSA, the maker of Peugeot and Citroen cars, earlier downgraded their growth forecasts for China this week. Last week, tire maker Michelin warned of falling sales in the country.

Increased Bets

Carmakers still have belief in China’s long-term potential and are taking steps to expand in new transport services and electrified vehicles. BMW this month revealed a $4.1 billion deal to secure control of its Chinese joint venture, becoming the first automaker to take advantage of China’s policy to let foreign companies own a majority holding of their local partnerships.

Hyundai Motor Co., whose sales in China fell 3.7% during the third quarter, said it would focus its efforts on boosting sales in China, with a plan to speed up timelines on China-focused models to woo customers, Vice President Koo Zayong said on a call.

The German luxury carmaker also is among Western brands boosting manufacturing capacity in China and expand local production of models including electric cars. Tesla Inc. is pushing ahead with plans to set up production in China to gain a bigger slice of the world’s largest electric-car market.

Daimler this week agreed to start ride-hailing and car-sharing services in China with its largest shareholder, using vehicles such as Mercedes-Benz S-class and E-class as well as the ultra-luxury Maybach.

“It is critical that carmakers place China at the core of their global mobility-services strategy as it is the world’s largest and most disruptive market, with far more riders than drivers,” Russo said. “They should not scale back but pivot to where the growth is heading.”