The Chinese economy is going through a rough patch, and that has led to widespread speculation that the country’s massive auto market will decline after years of rapid growth.
General Motors and Ford both reported good second-earnings, but industry analysts have been focused on the respectively vulnerabilities of both companies in China. (Fiat Chrysler Automobiles will report later this week.)
GM’s business there is well established and has contributed significantly to the company’s overall profits in the past few years. Ford has been playing catch-up in China, but over the last two years, it’s exceeded expectations for its competitive performance relative to GM and other established players, such as Volkswagen.
China is the world’s biggest auto market, with more than 20 million in annual new-vehicle sales; the US market, the world’s most dynamic and competitive, is running at about a 17-million new-car pace this year.
“It’s clear we’ve seen a market slowdown in China,” said Ford CEO Mark Fields on a second-quarter earnings call with analysts on Tuesday. “But we have to put this market in perspective.”
He stressed that Ford expects the China market to grow to 30 million in annual new sales over the next five to ten years. “But it’s going to go through fluctuations,” he said.
This is a typical verdict toward the China market from executives at major US automakers. GM CEO Mary Barra made comments on her company’s own second-quarter earnings call last week that were similar to Fields’. The major US car makers don’t look at China as a market in trouble or a market that’s set up for failure. They see its as a market that’s maturing.
A maturing market in a developing country is a double-edged sword. The go-go growth era could be moderating. But the buyership is gaining in experience and sophistication. For Detroit, this means that Chinese car buyers are getting interested in SUVs. And for Ford and GM, that could be a powerful driver of ongoing sales.
The SUV market is cyclical. In the US, it’s highly dependent on the price of gas and the overall health of the economy. Confident consumers and relatively inexpensive fuel combine to generate booming SUV sales. When gas prices spike or when the economy falters, consumers shift away from SUVs, which affects automaker profits negatively (they make a lot more money on SUVs than on cars).
Automakers are used to this, and US car makers are especially familiar with the SUV dynamic.
What they have seen in the US, they’re now seeing in China. But Detroit knows that the SUV market tends to come back. And when it does, if you’re building SUVs, you can bring in fat profits. GM CFO Chuck Stevens pointed out last week on the company’s second-quarter earnings call that SUV sales in China had surged 80% year-over-year.
When Ford and GM look at China, they don’t see a market for autos that is going to somehow retreat or collapse. It might slow down as its matures and as other factors in the economy affect confidence. There could be some short-term pain, but they see a market that increasingly mirrors the US market and that could ultimately be consistently twice as large. The base US market runs at around 15 million in annual sales — that’s the so-called “replacement” rate, with customers getting rid of old cars in favour of new ones — but the base Chinese market, as Fields predicted, could be 30 million.
Detroit is confident that the Chinese market will be huge. But it’s also familiar with downturns in the very tough US market. So they’re ready to ride out China’s current troubles and be well-positioned to sell very profitable vehicles when aggressive growth resumes.
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