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China slowdown fuels tougher race for carmakers

Automotive

A sudden slowdown in car sales in China and India is threatening to shrink the global auto market this year, promising tougher times for an industry leaning on the two most populous countries to pick up the slack in the West.

Early this year, industry executives had been optimistic that demand in the world's second- and 11th-largest car markets would charge ahead, despite fallout spreading from the US credit crisis.

But inflation, led by soaring fuel costs, and other economic problems have caught up with car consumption much faster than expected. In July, car sales in China rose 6.8% from the year before, the slowest pace in two years, while sales in India fell for the first time in about three years.

And while booming fuel and commodities prices have powered a faster-than-expected sales surge in resources-rich Russia, Brazil and the Middle East, that hasn't been enough to make up for struggling demand almost everywhere else.

“China is almost three times the size of the Russian car market so for every 1% reduction in Chinese sales you need a Russian rise of 3% to offset that,” said Adam Jonas, auto analyst at Morgan Stanley.

“For now, Brazil and Russia are helping to soften the blow but we have still revised down our global growth forecasts throughout the year.”

Morgan Stanley now expects global car sales to decline 0.3% this year to 58.1 million vehicles after forecasting an expansion of 3.5% at the beginning of the year.

China will still account for much of the sales increase as its economy heads for a sixth straight year of double-digit growth, but with so much resting on that market, competition is set to intensify just as fast.

In a sign of the times, Mazda Motor Corp last week halved its sales forecast at a Chinese venture selling compact cars, admitting it had set its goal too high.

Standard & Poor's says rising competition among carmakers in BRIC countries - Brazil, Russia, India and China - is already beginning to dampen profitability.

Within a few short years, China has turned into one of the most competitive auto markets from one of the most lucrative, suggesting even Russia, where foreign car sales grew 40% in July, could soon go down a similar road.

The unpredictable pace of growth underscores the importance of having a well-balanced regional portfolio - something that all big players are working on.

“We need to keep in mind that the BRIC markets aren't always going to be strong,” Mitsuo Kinoshita, executive vice president at Toyota Motor Corp, told reporters last week.

Based on first-half sales, the world's top three automakers, Toyota, General Motors and Volkswagen, relied on the mature North American, Japanese and European markets, excluding Russia, for up to two-thirds of their total sales.

For quick growth, heavy exposure to the fastest-growing BRIC markets, especially China, is still key - a mix that favors GM, Volkswagen and Hyundai Motor.

Its North American and general financial woes aside, GM is a formidable force in BRIC markets, ranking first in Russia and China and third in Brazil.

Volkswagen is a close second in both Brazil and China while it has plans to beef up sales rapidly in Russia.

Toyota has yet to make headway in India and Brazil, while it is now No.3 in China, climbing from nowhere five years ago. South Korea's Hyundai is the world's fifth-biggest automaker thanks to its big presence in China, India and Russia.

But analysts say the real race lies ahead.

The bulk of vehicles sold in Brazil and India are of the low-end variety - cars like Renault/Dacia's hit Logan model - that most top automakers still don't have.

“It's critical to have an entry-level car to compete in emerging markets,” said Morgan Stanley's Jonas.

“All big brands will come out with their 'Logan-fighters' over the next two years or so.”

Home-grown competitors are also stepping up, with India's Tata Motors due to launch the Nano, the world's cheapest car, next month.

Toyota, for its part, has said it would start production of a new, entry-level car in India in 2010 and Brazil in 2011. That will put it behind GM, which said last week it would launch a new small car in India next year, aimed primarily at emerging markets.

Yet having the right product is only part of the equation.

A solid distribution and sales network is just as vital, meaning first-mover advantage - like Fiat's in Brazil and Maruti Suzuki's in India - is hard to crack.

“That takes the most time, and it's part of the reason that Japanese automakers are sputtering in Latin America,” said UBS auto analyst Tatsuo Yoshida.

The same goes for Asia.

The Japanese have dominated the Southeast Asian market for decades and that looks unlikely to be challenged any time soon.

“They've got better transport cost logistics and generally, a better segmentation profile for the high-fuel-cost environment,” said Tim Armstrong, a director at Global Insight.

While Armstrong noted there was no single formula to win in developing markets, he said the Japanese likely had a short-term advantage since much of the current growth was happening in Asia.

“All the world growth is essentially coming from Asia and Russia, where the Japanese are well-placed. As a group, they're probably very strong.” (Reuters)

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