Boston, MA -- (SBWIRE) -- 09/10/2013 -- As Chinese wages have continued rising over the years, China's attractiveness as a manufacturing and export hub, on the back of cheap labour, is diminishing (see 'Rise Of Robots As Industry Moves Up Value Chain', December 4 2012). Our long-term auto production forecasts take that into account and we see them growing in line with our auto sales forecasts, mostly to satisfy domestic demand as exports are likely to enjoy slower growth rates in the coming years.

According to the China Association of Automobile Manufacturers (CAAM), China's June 2013 vehicle sales rose 11.2% year-on-year (y-o-y), to 1,754,084 units and sales for the first six months of the year grew 12.3% y-o-y, to 10,782,270 units. Despite the strong H113 performance, we are maintaining our full-year sales growth forecast of 8.4% as our H213 China economic slowdown view plays out. We expect some months in the latter half of 2013 to post significantly lower growth rates.

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Our Asia macroeconomic team believes that the Chinese economy is going through a structural change and will re-orient itself from being an investment-led economy to one where consumption forms a bigger share. In this light, we believe that demand for CVs will lag due to a reduction in construction as well as capital spending and sales growth in the passenger car segment will outperform in the coming years.

The recent rise in funding costs due to the Chinese banking sector's woes is a cause of worry for the vehicle market. Should a severe credit crunch flare up once more, small dealerships which already need to grapple with tight cash flows will come under greater pressure, potentially forcing many of them to shutter.

Domestic carmakers which have seen a surge in accounts receivables would also see a detrimental impact to their balance sheets and should they shelve expansion plans due to more expensive financing, auto sales would be indirectly hurt.

While premium car sales have recovered in the past few months in line with our view, the segment continues to be buffeted by regulatory headwinds causing us to exit our view of the luxury segment outperforming the broader passenger car market.

The recent worsening pollution in the country might force the government's hand to introduce hybrid subsidies, something which they had previously avoided due to the focus on pure electric vehicles (EVs). Toyota Motor has committed to hybrid battery production in the country, further bolstering our view given that even automakers believe in a possible shift in government policy in the near term.

According to industry reports, consumer financing is fast gaining acceptance in China. While helping to boost the market, it also encourages younger buyers to buy more expensive cars. Carmakers are increasingly trying to woo the younger generation to buy cars by coming up with newer and trendier models, so as to find new areas of growth.

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