China's Carmakers Face Profit Squeeze Amid Higher Costs and Shrinking Demand

Narrowing profit margins due to higher raw material costs have dealt yet another major blow to China’s carmakers as they face shrinking market demand amid a rollback of purchase subsidies and tax incentives. “The crux point is that most carmakers are facing squeezed margins and are unable to offer further price cuts to attract buyers,” said Qian Kang, the owner of a vehicle circuit board factory in eastern China’s Zhejiang province. “It is expected that several small players may be edged out because of weak sales.” Net earnings derived from selling a car priced at 100,000 yuan (US$14,780) now stood at just 1,500 yuan, translating into a profit margin of only 1.5 per cent, Chen Shihua, deputy secretary general of the China Association of Automobile Manufacturers (CAAM), told an industry conference in Changchun, the capital of northeastern China’s Jilin province, last week. That represented a sharp decline from the 3.4 per cent profit margin in May, according to numbers released by the China Passenger Car Association (CPCA). Government statistics show that downstream manufacturing sectors in mainland China reported an average profit margin of 6.1 per cent two months ago. In the first half of this year, sales of cars on the mainland plunged 20.2 per cent year on year to 8.7 million units, according to data from the CPCA.