Beijing a Crucial Showcase for Automakers as Growth Headwinds Build

The Beijing Auto Show, which begins April 25, will witness a skirmish between foreign and domestic automakers aiming to capture consumer interest amidst a downbeat growth climate for the industry.

Beijing alternates with Shanghai to host China’s flagship annual auto show. Merely five years ago, the 2011 Beijing Motor Show was an afterthought for foreign automakers as only a handful participated and Japanese car manufacturers unveiled no new models there.

Today China is the world’s biggest automobile market, and its Motor Show has gained the same significance as annual industry events in Detroit, Geneva, and Tokyo. It’s also a window into China’s massive—yet bizarrely fragmented—car market, with foreign sports cars showcased next to their Chinese copycat doppelgangers.

This year, global automakers reserved some of their biggest launches for Beijing. The pomp and circumstance underscores both China’s importance to automakers as well as the pressure of acquiring market share in an increasingly downbeat growth environment.

China is the biggest market for General Motors, which sold 3.6 million vehicles there last year, a 5.2 percent increase. Mercedes-Benz—which lags behind its German rivals BMW and Audi in China—sold 373,459 vehicles there last year, a 33 percent increase from 2014. Toyota’s luxury division Lexus saw its China sales jump 14 percent to 88,500 in 2015, becoming the brand’s second biggest market after the United States.

Major debuts in Beijing this year include the Acura CDX subcompact crossover, Citroen C6 (China-only), Infiniti QX Sport SUV concept, 2017 Lexus IS, Mazda CX-4 wagon, Porsche 718 Cayman, and a new Volkswagen Touareg concept.

Battle of SUVs

SUVs have become a bright spot in 2016 for the Chinese auto industry. Sales of SUVs soared 52 percent last year and helped drive overall car sales gains in March after a muted January-February period.

While government tax cuts no doubt assisted, SUV sales jumped 46 percent in March versus a year ago, according to China Association of Automobile Manufacturers (CAAM). Sedans, on the other hand, suffered a 3.3 percent sales drop.

Demand for SUVs is forecasted to continue in 2016, as consumers trade up from compact sedans and find low gas prices offsetting SUVs’ typically higher operating costs.

But foreign automakers were largely watching from the sidelines during in the recent SUV surge. The five best-selling SUVs in the first three months of 2016 were all Chinese branded. Chinese manufacturers account for 65 percent of the SUV market, and with lower prices, they dominate the lower end of the market.

“The Beijing Motor Show will be the platform for international and domestic auto makers to showcase new products, specifically SUVs in the aim to capture greater market share,” Namrita Chow, an analyst at IHS Automotive, wrote in a recent report.

New vehicle lineups at the Beijing Motor Show reflect this trend. Foreign automakers such as Honda, Mazda, and Volkswagen are bringing several crossover and SUV models to the show, hoping to carve out a larger piece of China’s SUV sales growth.

Competition is expected to be steep. Fiat Chrysler Automobiles’ Jeep brand will debut its China-manufactured Renegade. Honda Motor Co. plans to unveil two SUVs designed for China. Domestic brands such as Great Wall, China’s leading SUV brand, and Chery both plan to unveil at least one new SUV at the Beijing Motor Show.

Later this year, Shanghai Automotive Industries Corp., Guangzhou Auto Co. and Dongfeng Motor Co. are expected to launch as many as three new SUVs each.

Overcapacity Concerns

Foreign automakers are investing billions of dollars into manufacturing plants in China. General Motors opened a $1.3 billion Cadillac assembly plant near Shanghai this year, and will open another $1 billion factory in Wuhan next year. South Korea’s Hyundai plans to open a plant near Beijing later this year and another in Chongqing in 2017.

Investment research firm Sanford C. Bernstein projects a 22 percent increase in China’s car manufacturing capacity in the next two years to 28.8 million vehicles annually. That figure approaches the sum of the U.S. (17.5 million units) and European Union (12.6 million units) automobile markets combined.

CAAM estimates that Chinese passenger vehicle sales will reach 22.8 million in 2016. If that figure holds, Chinese vehicle sales would need to increase by 26 percent in 2017 for demand to meet capacity.

China’s auto sales during the first three months grew 6.8 percent, but sales are inflated by a sales tax incentive China implemented last September on small cars, which account for 70 percent of all sales. Consumers buying cars with engine displacements of 1.6 liter or less pay 5 percent sales tax—half of the 10 percent tax levied on all other vehicle purchases—through 2016.

Given the anticipated expiration of incentives, “2017 will be a very difficult year for the auto industry, probably no growth,” Yale Zhang, managing director of Automotive Foresight, a Shanghai consulting firm, told the New York Times.

In 2009 and 2010, a similar tax incentive propelled vehicle sales. When the reduction expired, auto sales effectively flattened in 2011 and 2012.

“Nobody foresaw how quickly demand would slow. Prices will fall. Profitability will suffer,” said Michael Dunne, a consultant on Chinese auto market strategy.

The Associated Press contributed to this report.