China loves German cars

German carmakers made record sales in the second quarter of 2014, owing in large part to strong growth in China. Sales revenues in the Asian giant grew 19 percent year-on-year just in the first half of 2014, according to a study released by Ernst & Young on Monday.

From 2009 to 2013, German automobile sales in China more than doubled, from 1.6 to 3.7 million units. German carmakers now enjoy a record 23 percent market share in China - and an increasing proportion of German cars sold in China are being made there.

German carmakers are outperforming the global industry median in terms of growth in profits and units sold, E&Y reported. Total sales of the 16 largest carmakers in the world were 330 billion euros ($435 billion) in the second quarter, an increase of 2 percent compared to the same quarter a year earlier, and profits were up 5 percent. German carmakers' global sales revenues were up just 1 percent in Q2, but profits were up 20 percent.

Measured in total number of cars sold, German carmakers' sales were up 6 percent, higher than the increase in units sold by competitors from Japan (5 percent), France (4 percent), and the US (1 percent).

Chinese regulators cracking down

"The current strength of the German carmakers is due quite significantly to the Chinese market," said Peter Fuss, E&Y's senior automotive consultancy partner.

"But there are increasing signs that the challenges of doing business in the Chinese market will increase."

The flip side of German carmakers' growing success in China is their growing dependence on changes in the Chinese market. Recently, Chinese regulators have taken a run at foreign carmakers - including Daimler, Audi, Fiat, and Chrysler, among others - accusing them of monopolistic pricing of spare parts. Carmakers have responded by reducing some prices.

Clouds on the global automotive horizon

German carmakers have had an excellent year so far. But E&Y's report suggests a number of factors could weaken the outlook going forward. Risk factors include uncertain global economic growth prospects, geopolitical conflicts - including with Russia, an important market for German cars - and signs of economic stagnation in the eurozone.

Added to that, long-standing challenges include a weak market share in the USA, high rebates for new cars in Europe stemming from overcapacity and economic weakness in parts of the eurozone, export competitiveness challenges posed by a too-strong euro currency, and high investment requirements for new technology.

"The world has become less predictable; boom times and crises are cycling through at a faster pace. In that environment, companies have to keep their cost structure lean so they can react quickly and flexibly in case of a downturn. Current geopolitical tensions are, among other things, a signal to companies that they should work even harder at their competitiveness," said E&Y's Fuss.

nz/hg (dpa, Ernst & Young)