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Carmakers rethinking China strategy as demand softens

China's booming economy over the past 20 years led to a surge in auto sales, but a recent softening market has major automakers rethinking operations in the country.

In 2018, sales of passenger cars in China hit 23.71 million units, down 4.08% year over year, according to China's Association of Automobile Manufacturers, or CAAM. The auto market in China is maturing, with fewer consumers purchasing vehicles as Chinese economic growth slows and ride-sharing services grow in popularity, according to experts. They also cite the country's crackdown on micro-lending in which unauthorized organizations were giving out loans.

In the first few months of 2019, Ford Motor Co. said it was cutting jobs in China and Hyundai Motor Co. said it is contemplating pulling back on production in China. There is speculation that other foreign automakers might follow suit.

Bill Endemann, senior adviser at ZoZo Go, an automotive consulting firm specializing in China, said some automakers may leave the China market entirely, as Suzuki did in 2018, because of the market downturn and increased competition. But he believes that, ultimately, most carmakers are taking a longer view on the country.

"The majority of automakers will hunker down and look to play the long game," Endemann said in an email to S&P Global Market Intelligence. "Look for them to release fresh new models, as well as increase marketing efforts to target the vast luxury market."

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"[China's] car sales have been plunging on a year-over-year basis for the last six to seven months," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business.

"You're going to start hearing that kind of news a lot more this year," Dhawan said, referring to layoffs and plant closures.

Plant closures and layoffs are normal responses in a developing market as competitors vie for a share of the market, said David Dollar, senior fellow at the Brookings Institution's John L. Thornton China Center.

"For most of these big international auto companies, China is the main source of profit for them," Dollar said in an interview. "It would take a little while to see how the shakeout plays out and see the dust settle."

Some of these companies will maintain a solid share of the market, Dollar said, with any closures or layoffs chalked up to fine-tuning.

Endemann said there are several reasons for the decline in auto sales in China.

"Beyond the most obvious reasons (China's economic downturn and trade tensions) there are several: the phasing-out of tax cuts on small cars, the rapid growth of ride-sharing and China's crackdown on micro-lending, which was especially prevalent in smaller cities," Endemann said.

Georgia State University's Dhawan said China is trying to restart consumption with tax cats and cheaper interest rates.

"If it's really successful, then people end up buying cars," Dhawan said. "If not, car sales won't pick up. It's a little bit of an unknown."

Dollar, from the Brookings Institution, said China has seen "extraordinary growth" in terms of auto sales over the past two decades as middle-class families purchased a vehicle for the first time, but a slowdown was inevitable.

"If most of the urban middle class has a car, then most of the sales have to slow down because then you're really looking at replacement and a relatively small number of additional people moving into the middle class," Dollar said. "There's going to be a lot of uncertainty about how this market develops since so many people have bought their first car."

"China is still the biggest car market in the world, even with the slight decline," Dollar said. "It's likely to stay the biggest car market. All major car companies are in China — they see it as their future."

Automakers tweak operations

Hyundai told Market Intelligence that it is "reviewing production optimization to enhance competitiveness and profitability" in China and it might close down one of its plants in Beijing. The carmaker said a specific timeline for the potential plant shutdown is "under review."

South Korea-based Hyundai said it is hoping to improve performance in China by launching six new models, including two SUVs and three "new energy" — or electric — vehicles to align with consumer demands and market trends.

In February, Ford said it was reducing its workforce at Changan Ford, the Michigan-based automaker's joint venture with China Changan Automobile Group. The carmaker declined to quantify the layoffs, but The New York Times reported that "thousands of its 20,000 workers" were let go.

Ford told Market Intelligence at the time that Changan Ford must improve its "organizational efficiency" and build a streamlined team "to meet the needs of the market in 2019."

Ford builds passenger cars there for China's auto market, but according to the report, three assembly plants have been running at less than 20% capacity.

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Sales and outlooks

Ford's sales in China plunged 36.9% in 2018, coming in at 752,000 vehicles, compared to 1.19 million vehicles in 2017. General Motors Co. sold 3.65 million vehicles in China in 2018, down 9.8% from 4.04 million in 2017. Fiat Chrysler Automobiles NV sold 163,000 vehicles in China in 2018, down 24.2% from 215,000 in 2017.

Ford told Market Intelligence that it plans to regain momentum in the country "through an aggressive cadence of product introductions, growth plans for the dealership network, and go-to-market capability improvement actions."

This plan also includes localization efforts.

"As we build Lincoln's future in China, we plan to launch one localized vehicle in China each year, from 2019 through 2021, a Ford spokesman said. "We will also begin local assembly of the new Explorer."

GM told Market Intelligence in an email it is clear that the auto market in China is maturing and the slowdown is impacting sales.

"But we continue to believe vehicle demand in China will be strong over the long term," the company said. "We have about 20 new and upgraded products launching this year, and we have a sharpened focus on luxury vehicles and midsize/large SUVs which will help us meet customers' evolving needs."

GM declined to elaborate further on the Chinese market and referred to comments made during its April 30 earnings call.

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GM Chairman and CEO Mary Barra said during the company's April 30 earnings call that there is uncertainty for consumers in China because of stimulus discussions that have not yet been finalized. The outcome could influence the automaker's operations in China.

"We need to see the final details and how this will translate into demand for autos," Barra said.

In February, Fiat Chrysler's CEO Michael Manley said the automaker "faced significant hurdles in China" in 2018 and that the auto industry as a whole will face a tough road in China during the first half of 2019.

"My view, whether it's right or wrong, but it is the view that I have, is that industry in China will be bumpy again in the first half," Manley said on the company's fourth-quarter earnings call Feb. 7. "And then as we get into the second, we'll see some year-over-year growth."

Fiat Chrysler declined to comment on China ahead of releasing its first-quarter 2019 earnings due May 3.