As Volkswagen's China profits falter, some analysts are warning of harder times to come
The recent decline in profits at Volkswagen's mainland ventures may be a harbinger of more serious problems to come for the China vehicle industry, say some analysts.
Standard & Poor's Frankfurt-based analyst Maria Bissinger said lower industry-wide profitability was underlined by the German car giant's fall in profit in the third quarter of last year. Sales growth slowed to 37 per cent in the third quarter from 52 per cent in the first half, S&P said.
According to Merrill Lynch analysts, the combined net profit of Volkswagen's two China ventures fell 36 per cent year on year, reflecting falling prices and growing competition. Merrill analysts expected the fall in fourth-quarter earnings to be even steeper. The projected fall in net profits during the second half of last year would largely offset an 87 per cent year on year profit growth in the first quarter and a 42 per cent rise in the second quarter.
Volkswagen's Beijing spokesman said the company did not disclose the bottom-line figures of its joint ventures with Shanghai Automotive Industry Corp in Shanghai and with First Auto Works in Jilin. Last month, a Volkswagen official said the company planned to boost capacity to two million units by 2008 from 800,000 last year, a more aggressive goal than the 1.6 million target announced last year.
China's car market is still protected by import quotas and tariffs of between 34.2 per cent and 37.6 per cent, but quotas will be phased out next year and tariffs will fall to 25 per cent in 2006. The lower tariffs, combined with more competition, is driving prices down.
