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Carmakers Greet 2005 with More Price Cuts

China's slowing car market has driven into the new year with a new round of huge price reductions.

FAW Car Co Ltd, the Shenzhen-listed arm of the country's top vehicle producer First Automotive Works Corp (FAW), slashed the prices of Mazda 6 sedans by 25,000-40,000 yuan (US$3,020-4,830) on January 1.

Tianjin FAW Automobile Co, another affiliate of FAW, axed the prices of its Vizi and Vela compact cars by up to 15,000 yuan (US$1,800) on the same day.

A slew of other automakers will also launch price cuts this month, such as Nissan's joint venture with Dongfeng Motor Corp and Kia's venture in eastern Jiangsu Province, according to market sources.

The prices of many imported cars, including models by Volvo, Land Rover, Hyundai and Skoda, dropped over the past week on the back of WTO-required tariff cuts.

The reductions extend last year's price wars between manufacturers eager to boost sales and clear huge inventories, said Jia Xinguang, chief analyst of the China Automotive Industry Consulting and Development Corp.

"There appears to be no other way to attract customers, so producers will use price cuts to attempt to get the upper hand this year," Jia said.

Prices in the domestic car market are forecast to fall at an even faster rate this year; 15 percent or more compared to last year's 10 percent, said Cao Jianhai, an industrial researcher with the Chinese Academy of Social Sciences.

Car sales growth has slowed due to banks' controls on car loans, high oil prices and customers' persistent expectation for cars to become yet cheaper.

Cao predicts the domestic car market to grow by 10 percent year-on-year in 2005.

Xu Changming, from the State Information Center, forecast total sales of China-made vehicles growing 12 percent to 5.64 million this year, with that of passenger car sales increasing 16 percent to 2.64 million units.

Xu estimated that total sales of China-made vehicles and sales of passenger cars reached 5.04 million and 2.27 million units last year, up 16 and 18 percent year-on-year.

Year-on-year growth in total vehicle and passenger car sales stood at 34 percent and 75 percent in 2003.

"Car prices will continue to be brought down mainly by automakers in China instead of imported cars as the latter only accounts for a tiny slice of the overall domestic car market, although the nation will continue to cut tariffs," Xu said.

Imported vehicles control some 4 percent of the domestic auto market, but quotas on imports were removed and tariffs cut to 30 percent this year from last year's 34.2-37.6 percent. They will fall to 25 percent by the middle of next year.

China Association of Automobile Manufacturers spokesperson Zhu Yiping suggested domestic automakers should cut their production in order to maintain price stability.

"They should discuss joint action in the same way members of OPEC do. Some automakers' cuts have been harebrained and destroyed customer confidence," Zhu told China Daily.

Xu said prices in the domestic car market will stabilize next year.

"However, car prices in China will tumble by 50 percent in four years due to mounting competition, domestic producers' expanding economies of scale, and lower income levels and labor costs in China than in the developed markets," Cao said.

Domestic car prices will ultimately be 40 to 50 percent lower than in developed markets, Cao said.

Oversupply in the domestic market will continue to grow this year as a result of new production capacities and slowing sales, he added.

Car production capacity in China will be 30 percent larger than real domestic car demand this year, up from last year's 20 percent, he said.

Carmakers' and dealers' total inventories stood at nearly 600,000 at the end of last year, according to reports.

"Many automakers in China will suffer losses in 2006 because of slowing sales and diving car prices," he said.

There are around 120 vehicle plants in China, with more than 30 turning out passenger cars.

(China Daily January 6, 2005)

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