AUTO sales data released last week showed that the once buoyant market has hit a downturn.

With tight monetary control and natural disasters slowing China's gross domestic product to 10.1 percent in the first half of this year, car sales also grew at a slower pace, especially since the second quarter.

Most analysts believe that the auto industry, one of the main drivers of China's economic development, will remain upbeat but face tougher challenges.

China's Association of Automobile Manufacturers announced last Tuesday that the nation's vehicle sales expanded by 18.5 percent to 5.18 million units from January to June from a year earlier.

The growth is 4.78 percent slower than the same period last year.

Car sales saw a sharp decline in growth. The country sold 2.66 million cars in the first six months, 16.7 percent more than the same period last year.

The growth rate, however, was nearly 10 percentage points lower than the 25.9 percent recorded at the same time last year.

Various factors triggered flat sales.

China adopted tight monetary controls in the second half of last year to combat the rising yuan, increasing cost of raw material and labor costs.

It also raised the reserve requirements for banks to tame record high inflation after the snowstorm and earthquake.

Tighter controls on the economy and commercial credit began to affect growth and led to the decline in the share market, which tumbled nearly 50 percent so far this year. And slower property sales have also dented consumer confidence.

Fuel price rise

But the 17-percent price rise for gasoline in June had an immediate negative impact on car sales.

Amid the gloomy economy outlook and limited purchasing power, many would-be buyers canceled their purchase plans or decided to wait and see.



"Reviewing the half year, it's quite negative. The market is still growing at a double-digit growth but conditions are a lot harder," said Nigel Harris, general manager of Chang'an Ford Automobile Sales Co.

"Because of the tight money supply, it's more difficult to get personal credit and dealers' ability to get the money is also difficult," he told Shanghai Daily.

Chang'an Ford Mazda Automobile Co, the flagship venture of Ford Motor Corp, said its sales grew 25 percent for the first half of this year. Ford-branded vehicles added 15 percent year on year during the same period.

General Motors Corp posted its slowest half-year sales growth in China at 13 percent, while Volkswagen AG reported its half-year sales gained by 23 percent to a total of 531,612 units.

"Car makers are facing serious pressures because of their higher sales expectation and weak market demand," said Xu Changming, senior economist from the State Information Center.

"Many car makers set an average target of 20 percent sales growth for this year and expanded production. But the market demand is at around 10 percent," he added.

Gloomy outlook

Since economic controls are unlikely to be lifted, analysts don't expected sales to pick up in the second half.

"Those factors will delay people's purchases until next year," said Zhang Xin, an auto analyst from Guotai Jun'an Securities Co Ltd. "But China's market potential remains large because of the low market penetration of automobiles."

Ford has lowered its full-year projection of overall growth to 16 percent, down from the 20 percent forecast earlier. But it hasn't changed its sales target for the whole year.

Demand will increase for smaller, more fuel-efficient vehicles, predicts the SIC's Xu.

Toyota launched its Yaris compact car in March and Honda also rolled out its revamped Fit hatchback this month. More models are expected to join the competition.



Ford said its new Fiesta compact car to be introduced within six months will give a major boost to its annual sales target.

"Customers began to understand the cost of fuel and buy smaller models," Ford's Harris said.

Economy cars saw a 19.2 percent sales increase for the first five months of this year from a year ago, outpacing the 16.1 percent growth for mid-to-high sedans.

The figure for premium cars was down by 3.4 percent from the same period last year, according to SIC's report.

Higher production and lower market demand has also driven makers to offer discounts on cars to boost sales.

But SIC's Xu said this would not go far enough to stimulate demand. "Car makers need to reduce their production and expand their exports to face the challenge."

Ford lowered the price of its Mondeo Zhisheng in April, followed by Volkswagen's Magotan in the mid-to-high class segment.

"There is too much stock around, and that puts a lot of pressure on car makers and drags down the transaction price amid heated competition," Harris said.