The profit growth of major automakers in China is slowing down sharply as a result of dormant vehicle sales, price cuts and high production costs.

China's top 13 State-owned automakers reported 15.01 billion yuan (US$1.81 billion) in profits during the first five months of this year, an increase of only 1.3 per cent from a year earlier, statistics from the State-owned Assets Supervision and Administration Commission of the State Council showed.

The full 2003 year had seen a profit increase of more than 50 per cent.

The commission blamed the meagre profit growth mainly on cooling domestic vehicle sales because of the government's macro economic controls impacting car loans by banks; and oil price hikes.

Sales of domestically-made vehicles dropped by 20.43 per cent to 396,200 units in May from April.

Analysts forecast sales in June will continue to decline from May, although no official figures have been released.

"If total vehicle sales grow by less than 20 per cent this year, the auto industry's profits will be lower than last year," said Li Chunbo, an analyst with CITIC Securities Co.

Vehicle sales in China during the first five months of this year rose by 27.57 per cent year-on-year to 2.17 million units.

"A growth of over 20 per cent in vehicle sales could fend off pincer attacks on automakers' profits from auto price cuts and high material costs," Li told China Daily.

"The second half of this year will be very critical to whether or not automakers can earn more profits than last year."

Many automakers in China, such as the General Motors, Nissan, Volkswagen and PSA Peugeot Citroen joint ventures, have slashed the prices of cars over the past two months to boost sales.

Prices on the domestic passenger car market declined by 10 per cent on average during the first half of this year.

At the same time, the price of automaker materials such as steel rose considerably, especially in the first four months of this year.

"We face mounting profit pressures from fierce competition all around," said Qin Huanming, general manager of Volkswagen's joint venture in Northeast China's Jilin Province. High prices for imported components, due to the strong euro, increased the joint venture's costs by more than 2 billion yuan (US$242 million) last year, Qin said.

The company, which is producing Volkswagen Jetta, Bora and Golf models, and the Audi A6 and A4, is the second largest Sino-foreign car joint venture in China.

Li predicted the auto sector's profit margin will stand at 7 to 8 per cent this year, down from 9 per cent last year.

But the margin is still higher than the 3 to 5 per cent in developed auto markets.

"The auto profit margin in China is expected to decline to similar levels to developed auto markets within the next two to three years with further price cuts," he said.

The output value of China's 13 biggest State-owned automakers climbed by 21.4 per cent year-on-year to 181.87 billion yuan (US$21.96 billion) from January to May this year.

Meanwhile, automakers' core business revenues increased by 18.7 per cent to 191.65 billion yuan (US$23.15 billion).

(China Daily July 2, 2004)