After several years of rapid growth, the auto market experienced a sudden decline in production and sales starting in March this year. The downturn persisted for four months, prompting experts to suggest that the industry is entering an adjustment phase. They identified several factors contributing to the current situation: the rapid expansion of domestic automotive production, ongoing price declines, expected reductions in import tariffs, and the impact of national economic cooling measures.
Recent statements from officials at the Ministry of Commerce, the State Council’s Development Research Center, and the China Association of Automobile Manufacturers indicate that with the stabilization of macro-control policies and holiday-related demand, the auto market is expected to grow steadily throughout the year. However, excess supply remains a concern. The total supply in the domestic market includes domestic output, imports, and inventory from previous periods.
According to Dr. Qing Wang of the State Council’s Development Research Center, the first-half passenger car supply reached about 2 million units, while demand was around 1.763 million, leaving a supply-demand gap of approximately 240,000 vehicles. When considering hidden dealer inventories, the gap could be even larger. In Q1, the gap was about 90,000 units, but by Q2, it had increased to 150,000, showing a worsening trend.
Although some manufacturers reduced production in June, the average monthly growth in passenger vehicle output from January to June still stood at 33.2%, nearly one-third higher than the same period last year. Meanwhile, the year-on-year growth in sales has been declining, averaging 28.2% per month—significantly lower than the production growth rate. This imbalance is expected to worsen in the second half of the year.
Experts note that the current drop in sales is more about a slowdown in growth rather than an actual decline. Despite this, the overall market still shows strong growth in circulation. Several factors are driving the current downturn, including sharp price cuts in May, which have increased consumer caution and reinforced expectations of further price drops. This has led to a cycle of “price reduction – hold-to-buy†behavior.
Additionally, consumers anticipate further tariff reductions on imported vehicles next year, which may lead to a broader price decline. The initial price cuts in the first half of the year have already influenced consumer perception. Long-term high prices have also contributed to a temporary demand release, now resulting in a normal decline.
Moreover, rising consumption costs and tighter credit conditions have limited short-term demand. Price reductions have gradually extended to higher-priced models, with mid-range cars (100,000–200,000 RMB) being affected by March, and even premium models (up to 300,000 RMB) beginning to see cuts by June.
Dr. Wang noted that although sales declined in March, the overall transaction volume did not show a significant drop. The shift in competition is now focused on higher-end models. It is expected that by September, market demand will improve, with passenger car production in the second half of the year growing by 30%–35%. Annual production is projected to reach 4.1–4.2 million units, with sedans increasing by 35%.
According to a Ministry of Commerce report, total auto production in 2004 is expected to hit 5 million units, up 13% year-on-year, with cars reaching 2.4 million units. Prices are expected to fall by about 3% in the second half of the year. Although manufacturers have gained experience in price cuts since 2003, large-scale or frequent price reductions are unlikely. However, competition remains fierce, especially among high-end models, and domestic companies still have room for further price adjustments.
In the second half of the year, sales are expected to rebound. The State Council’s Institute of Market Economy predicts a steady upward trend, with annual sales growth reaching 30%, and total passenger car sales expected to rise to 3.9–4.05 million units. Sedan sales are projected to increase by 33%, reaching 2.55–2.65 million units.
Xu Changming, deputy director of the National Information Center, believes that despite the slowing growth in production and sales, long-term demand for automobiles remains strong. With continued economic growth, many households have the potential to become new buyers. He predicts that total car demand in 2005 will reach 5.9 million units, surpassing Japan to become the world’s second-largest auto market. By 2010, the figure is expected to reach 8.7 million units.
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