Germans hardest hit by slow China sales

The demand for luxury cars in China is dropping due to the slowing Chinese economy.
The demand for luxury cars in China is dropping due to the slowing Chinese economy.PHOTO: REUTERS

Strong dependence on Chinese market now seen as liability

FRANKFURT • The slowdown in the Chinese car market, the world's largest, may be affecting the entire industry, but it will hit German makers the hardest given their strong presence there, analysts said.

At the Frankfurt Motor Show, which opened to the press on Tuesday and the public from today, German companies such as Volkswagen, BMW and Mercedes-Benz have the biggest stands, generally dwarfing those of their foreign rivals. But the impressive displays cannot hide the difficult position they find themselves in, despite the new dynamism of car sales in Western Europe and the United States.

"The golden years are over in China," said Mr Stefan Bratzel, director of the Center of Automotive Management. While car sales practically trebled in the world's No. 2 economy to 23 million units between 2007 and last year, they are projected to grow by just 35 per cent between last year and 2021, according to forecasts by consultants AlixPartners. Gone is the era of double-digit growth rates: After 14 per cent in 2013 and then 7 per cent last year, market experts are projecting growth of "around 3 per cent" this year.

"The normalisation of the Chinese market was expected," said Mr Elmar Kades at AlixPartners. But a slowing economy coupled with falling stock markets are putting additional brakes on sales of foreign-made cars in China. And German companies stand to feel the pinch the most, since they have long been present in China and earned huge profits from the explosion in demand there in the past.

"For years now, rivals could only see the tail-lights of their German competitors. But the air is getting thinner for them, too," said Mr Peter Fuss, car expert at consultancy firm EY. "Their strong dependence on the Chinese market could now be seen as an Achilles' heel."

China represents more than a third of their global sales for German heavyweight Volkswagen. That is a similar proportion to that of US rival General Motors. But the two are not equally placed when it comes to how they will cope with slowing demand. German expert Ferdinand Dudenhoeffer said that makers of cheaper, more affordable cars will fare better than their higher-end rivals. GM with its inexpensive Baojun is therefore in a better position than the German giant, which owns Audi, Porsche and Skoda.

At the end of July, Volkswagen - which has overtaken Toyota as the world's No. 1 car-maker - scaled back its sales targets given the situation in China. Mr Dudenhoeffer predicted that the premium sector, dominated by German brands such as Audi, BMW and Mercedes-Benz, would see stagnant sales in China this year and a decline of 4 or 5 per cent next year.

Mercedes-Benz, which is owned by Daimler, is still something of an exception. For a long time it trailed behind rivals Audi and BMW. But a range of new products enabled it to notch up growth of 28 per cent in China during the period from January to last month.

By contrast, the other two are hurting, with Audi sustaining a drop in sales of 4.1 per cent in China last month, and a drop of 0.8 per cent in the first eight months. BMW saw its sales fall by 1.4 per cent last month, but managed to clock up a modest 0.9 per cent increase in sales in the first eight months.

Nevertheless, German car- makers were trying to put on a brave face at the motor show.

"Growth in China has slowed, without doubt. But I believe demand for mobility will remain very strong," said Volkswagen CEO Martin Winterkorn.

BMW chief financial officer Friedrich Eichiner agreed, saying that "despite the current development, China still has substantial growth potential". "We knew it couldn't go on forever. It was clear that we wouldn't always see high double- digit growth," he said.

With just 70 cars for every 1,000 people in China, compared to 500 for every 1,000 in Germany, there is still substantial potential for growth in the medium- and long- term, analysts said.

"It remains the most important car market in the world," said the head of the German car-makers' federation VDA, Mr Matthias Wissmann. "German makers continue to command a strong position. The goal is to hold on to that position."


A version of this article appeared in the print edition of The Straits Times on September 19, 2015, with the headline 'Germans hardest hit by slow China sales'. Print Edition | Subscribe