China growth slowdown slams brakes on auto market
[SHANGHAI] Chinese luxury auto dealer Sunfonda was in the fast lane to success as the country boomed but a slowdown in the world's number two economy has slammed the brakes on the firm's ambitions.
The worst economic performance in a quarter century and a prolonged government crackdown on corruption have hammered luxury car sales in the country, and Sunfonda last month announced a 75 per cent slump in first-half net profits.
Sunfonda set up its first dealership for Germany's Audi in Xian 13 years ago, and accelerated as China overtook the US to become the world's biggest auto market in 2009.
Even in lagging inland provinces far from China's developed eastern coast, new fortunes built on a resources boom and property speculation fuelled demand for luxury cars.
Sunfonda now has 28 outlets in seven provinces, grouping brands such as Porsche, Mercedes and Maserati, and more than 2,000 employees.
But stumbling growth and a crackdown on graft launched by Chinese President Xi Jinping more than two years ago have hit the company.
Chinese share prices have plummeted since June, wiping out paper wealth and knocking sentiment, crucial to high-end auto sales as an uncertain future makes people less likely to spend big.
"It is a reality that China is now seeing slower economic growth and a sluggish luxury car segment," Sunfonda said in a letter to a dealer industry group, which was seen by AFP.
China is crucial to foreign auto makers, which dominate the market, given weak sales in Europe and a still recovering United States.
There were 23 million vehicles sold last year, a 6.9 per cent annual rise, but some forecasters are predicting a fall this year, forcing manufacturers in the country to slash prices and cut production.
Some dealers have even demanded compensation from automakers, in cash or subsidies, as unsold stocks mount.
"Inventories are increasing, sales slowing and (manufacturers) are starting to reconsider their production strategy - all signs of increasing competition and a much tougher environment," said Lian Hoon Lim, managing director of advisory firm AlixPartners.
He added that 2015 was likely to be a "downbeat year".
In the latest blow for Sunfonda, Italian sports car builder Maserati has said it is terminating agreements for dealerships in Xian, Taiyuan and Yinchuan.
According to a Sunfonda executive the three have lost at least 24 million yuan (S$5.3 million) combined.
The Chinese company is now seeking legal arbitration in Shanghai over the termination, claiming the original contracts were unfair.
"It was OK before as conflicts were hidden while everyone was making money," the Sunfonda representative told AFP, declining to be named due to the legal proceedings. "However, low profitability has now revealed the conflicts." Maserati said in a statement it was not pulling out of the three cities, only changing its local Chinese partner to give its brand more focus.
But Maserati CEO Harald Wester told AFP in April that maintaining China sales at last year's 9,400 vehicles would be "a very difficult task".
Hong Kong-listed Sunfonda is responding to the downturn by adding dealerships for more budget-oriented brands such as Ford of the United States and Volvo, owned by China's Geely, as well as expanding its auto servicing and used car offerings.
In the first eight months of the year, China's overall auto sales reached 15.02 million vehicles, flat from the same period in 2014, according to an industry group.
But the China sales of US auto giant General Motors dropped 4.8 per cent year-on-year in August, according to the company. Ford, which has already cut production in China, recorded a 3.0 per cent fall in its sales in the country last month.
The developments are changing the nature of competition in a market that once offered dazzling prospects.
Yale Zhang, managing director of industry research firm AutoForesight in Shanghai, told AFP: "In a weak economy, whoever slides the slowest will be the winner."
AFP
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