German, Japanese Cars Lead China Sales Growth

German and Japanese passenger cars are enjoying such strong sales growth in China’s first-tier cities that domestic brands may have to cede those markets entirely, in the view of some analysts.

Passenger car sales in China grew a modest 7.1% in the first half of the year to 5.87 million units, according to the China Association of Automobile Manufacturers, while total auto sales hit 9.6 million units. For the month of June, total auto sales hit 1.58 million units, a growth of 9.9%. Passenger car sales for the month surged 15.8% to 1.28 million.

Parsing the data suggests most of that growth was fueled by a surge in sales of German and Japanese brands.

Top sales growth was posted by Germany’s BMW, with a surge of 61% for the first half over the same period of 2011, followed by Audi with 37.8%.

Next came Toyota with 24.9% growth, followed by Honda with 20.5%. Nissan posted a 14% growth, possibly because its supply chain had suffered least from the earthquake and tsunami of last March 11. A substantial part of the growth enjoyed by the other Japanese brands may be attributed to the effects of that disaster.

Mercedes-Benz posted a more modest 11% growth.

Most domestic brands either saw flat sales or a slight decline. Their China sales outlook for the immediate future isn’t bright in view of the recent new car registration cap of 10,000 units a month introduced in Guangzhou this month. It is the fourth major city to do so after Beijing, Shanghai and Guiyang. Other top-tier cities are expected to follow suit to address congestion and pollution problems.

These new-car registration restrictions are expected to hurt domestic brands more because the scarcity of license plates makes prospective buyers more likely to use them on prestige cars. Most import buyers are located in top-tier or second-tier cities.

But prospects aren’t entirely bleak for China’s domestic automakers. They have begun enjoying success in exporting to South America, the Middle East and Russia. In fact, during the first five months of the year exports of China-made cars jumped 21%, with 43% growth posted in May. Admittedly the growth is over a weak base, but the cost advantage of Chinese brands is big enough to sustain export growth for years to come.

For example, in S. Korea a car made by China’s Chery costs just $5,500 compared with $12,000 for a comparable Toyota.

The main obstacle in advanced markets is that Chinese brands have yet to establish a quality image. Every 100 cars made in China have 232 reported defects compared with 131 for international brands, according to JD Power. That quality deficit is likely to disappear by 2018, according to the head of JD Power China, allowing more access to markets in North America and Europe.