CHINA, INDIA CAR MARKET RECOVERY FACES LONG ROAD AHEAD

Vehicle sales in India and China shot up last month by the kind of pace that made them the toast of the car industry early last year, but it might be too soon to break out the bubbly again just yet.
 
Monthly demand for automobiles in the worlds two most populous nations had been rising by double-digits in the first half of 2008 as a growing middle class enjoyed the fruits of a booming economy. Then the credit crisis hit, and demand evaporated.
Governments in both countries have since rolled out incentives to reverse that trend, helping year-over-year sales in February jump nearly 22% in India and by 25% in China. But few analysts expect those rates to last as credit remains tight and a convincing economic recovery appears far off.
 
We are not sure if the February numbers (in India) point to a revival or not, said Hitesh Kuvelkar, associate director of research at Mumbai-based First Global Securities. This performance has to be sustained over three to four months at least, before we can call it a revival or bounce-back. A solid recovery in both markets is crucial for global auto makers such as General Motors Corp., Toyota Motor Corp. and Volkswagen AG.
Sales are sinking alarmingly in the US and in most of Europe, where some governments are also trying with varying degrees of success to shore up demand through tax breaks and other incentives.
 
Expectations are especially high as sales in Brazil and Russiathe other components of the once-zooming Bric (Brazil, Russia, India, China) marketslag even further, with monthly vehicle sales recording falls so far this year.
 
Sustainable spike?
Analysts attributed the sales surge in India last month to the governments stimulus of cutting another 2% from excise duties after a 4% reduction in December, as well as the handout of higher wages to central government employees.
 
A reduction in interest ratesauto loan rates fell by about 2 percentage points last monthalso helped turn some of the pent-up demand into sales, they said.
In China, many expect this months sales to reverse the surge in February, which had five extra working days compared with the previous February, when the Lunar New Year holidays occurred.
 
A single month of data is no evidence of a sustainable recovery, said John Zeng, an analyst with IHS Global Insight, adding that March could show a decline from a record high for the same month last year. Car sales cannot be isolated from the broader macroeconomic environment, which has not shown signs of recovery so far. China has not been hit as badly as other (economies) in the current financial turmoil, but it certainly has felt the pain, he said.
 
Long road to recovery
Few carmakers are providing a forecast for 2009 sales, given the unpredictable outlook of the global economy. But with state-backed incentives pushing along much of the sales, analysts said future demand will depend largely on how long and how much more governments are willing to do.
 
Michael Boneham, head of Ford Motor Co.s Indian unit, said easing the credit crunch was critical to boosting sales in India, which he said was less vulnerable to the global recession than China since exports were not as big a driver of its economy.
 
The credit crunch...is causing a concern in the short term because we have customers who want to buy cars but have no source of credit, Boneham said. Its a long road to recovery, he said, noting that the consensus view seemed to point to a turnaround only in 2010. Arvind Saxena, senior vice-president of marketing and sales at Hyundai Motor Co.s Indian arm, noted that last months sales had been helped to some extent by an easy comparison from the year before, when many held off their purchases until March ahead of a budget announcement. The overall market situation continues to be challenging and not much should be read into the growth in February, he said.
 
China, meanwhile, may not grow at the breakneck pace seen in the past few years, but analysts expect sales to rise as the economy keeps growing, albeit at a slower pace.
IHS Global Insights Zeng expects full-year growth to be capped at 10% this year. Thats still a big improvement on the 20% fall JD Power sees for US light vehicle sales in 2009, and others think China may even do better.