Foreign Car Companies Face China Flop

Three years ago, China seemed so promising to foreign car companies. Annual sales of cars and light trucks passed those in the United States, which had been the largest market for close to a century. The market in the People’s Republic grew at double digits. It was only a matter of time before sales would double those in the United States. But that promise has ended, and could rapidly become a nightmare.

The Chinese car market quickly became crowded because it was seen as the Holy Grail for sales, a target for units sold that could pull troubled U.S., European and Japanese manufacturers out of the doldrums in their home markets. General Motors Co. (NYSE: GM) and Volkswagen held the top spots in market share because of decades of work in China. Mercedes, Audi and BMW had large presences, becoming highly popular in the upper end of the market. Late comers, at least in terms of sales volume, which included Ford Motor Co. (NYSE: F), Chrysler, Toyota Motor Corp. (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC) and several large European-based manufacturers, hoped to muscle in.

Three things conspired to take the air out of the Chinese vehicle market. The first was the expiration of tax credits for Chinese car buyers, which expired more than two years ago. Analysts saw these credits as a catalyst of demand among China’s huge and growing middle class.

Second, the market in China became less attractive to any single car company, not only because of foreign competition, but also more aggressive manufacturing by local firms, led by SAIC Motors, which also has a joint venture with GM. As a matter of fact, some foreign car companies are worried that Chinese manufacturers will use what they have learned from outside firms to improve their own operations.

Finally, the most unanticipated problem for car companies, both foreign and domestic, is the rapid rise in what already was terrible air pollution in China’s largest cities. The trouble has caused a slowdown in the use of factories, which have high emissions of air pollutants, and has forced local governments to take cars off the road and restrict car use in some cities.

China, the best hope of improved sales for the global car industry, is not that any longer.

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