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China car dealers slash prices and give cheap loans amid worst slump

Slowdown in the economy, trade tension with US weigh on consumer spending power

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A sales representative waiting for customers in a luxury car showroom in Beijing. Smaller Chinese manufacturers may be more exposed than foreign brands, which can rely on sales outside China.

Beijing

CHINA'S worst car-market slump in a generation is forcing manufacturers and dealers to resort to generous discounts and loan offers to lure buyers, as the slowdown hits automakers' profits.

Incentives and reductions equivalent to more than 10 per cent of the sticker price are now commonplace; interest-free loan offers abound as car-makers and dealerships struggle to bring buyers back to showrooms, especially outside China's cities.

But buyers aren't biting. Car sales have continued to decline this year after the first annual drop in more than two decades.

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Consumers are shunning big-ticket purchases like cars as the world's second-largest economy slows and the trade war with the US weighs on stock prices and consumers' spending power.

The heavy discounting threatens to put further strain on automakers' finances, potentially foreboding job cuts and mergers among the industry's hundreds of manufacturers.

Shi Jianhua, a deputy secretary-general of the China Association of Automobile Manufacturers (CAAM), said at a conference in January: "This year should be a year of the survival of the fittest and we may see more merger and reorganisation cases in the auto industry."

Smaller Chinese manufacturers may be more exposed than bigger global companies, which can rely on sales in other countries and have a more established brand following. Customers for cheaper Chinese brands tend to be consumers who live in smaller cities and rural areas and are often considering buying their first car - and thus are more easily affected by the slowing economy.

Cui Dongshu, secretary-general of the China Passenger Car Association, said: "The sales slump is adding more pressure on Chinese brands. The speed of the industry reshuffle will be accelerated."

With the slowdown hitting sales volumes and earnings, the stock prices of local companies such as Chongqing Changan Automobile Co, Brilliance China Automotive Holdings Ltd and BAIC Motor Corp have plunged by half or more in the past year.

Global brands are also facing headwinds. Hyundai Motor Co and Jaguar Land Rover parent Tata Motors Ltd slumped to quarterly losses, citing China woes. Suzuki Motor Corp pulled out of China last year.

On Jan 29, the government urged the local authorities to roll out measures to boost vehicle sales in rural areas, in an effort similar to a campaign a decade ago that successfully revived demand. While local governments haven't yet announced detailed incentive policies, automakers are moving ahead with offers of their own.

BAIC Motor cut about US$1,000 off the price of its Senova Zhidao sedan. Buyers can also choose a US$149 downpayment or zero per cent interest for three years, the Chinese partner of Daimler AG said on Feb 26. The offers apply in the less-congested rural areas.

Volkswagen's venture with China FAW Group Co said this month that it will offer an incentive package valued at US$1,800 for rural consumers who replace their aged Volkswagen models with new ones; Chongqing Changan said it will provide up to US$3,300 of incentives for buyers of its Oushan cars.

Tom Feng, who has worked at a BAIC dealership in the eastern province of Shandong for two years, said he and his colleagues are reaching out to potential customers in shopping malls and supermarkets, handing out flyers. They are also driving around in the models to spur interest, he said. "There are not that many people coming in asking about the promotion yet. I hope they would," he said. He is seeing only three or four groups of buyers come in each day, down from six to eight before the market began to decline in the middle of last year.

Xu Haidong, an assistant secretary-general at CAAM, said in January: "There is no easy solution to revive car demand. Car consumption hinges on overall economic development." BLOOMBERG