(August 12, 2010) The rapidly expanding car market in China has been critical to the earnings  of global auto companies like GM, VW, and Toyota. China’s insatiable demand for cars has pushed the nation ahead of decades-long market sales leader, the U.S., in total annual sales. Even smaller companies with niche products like BMW, have been helped.

China’s vehicle growth demand fell off sharply in July and reached a 16-month low, according to the China Association of Automobile Manufacturers. The increase in deliveries was up only 13.6 percent from the same period last year. At that rate, the Chinese market is growing more slowly than the U.S.

Some of the drop in growth may be due to inflation in the world’s most populous nation. China has tried to play down the effects of price increases in staples like food and fuel, but those prices may be growing at a rate of more than 10 percent. If so, the disposable income of the Chinese middle class is falling.

The other issue that could affect car sales is that China’s citizens save a larger part of their incomes than people in the U.S. and Europe do.The erosion of the value of wages could cause the Chinese to do what Americans did beginning three years ago — keep cars longer than usual or not buy them at all. According to Bloomberg, “Even as overall consumer prices rise, larger stockpiles of unsold cars and pressure by wholesalers to meet sales targets may lead to a decline in China’s vehicle prices in the second half of 2010, the country’s planning ministry said last month.”

Whether the slowing of the growth rate of vehicle sales is due to inflation or not, it is harsh news for foreign car companies, particularly the market leaders in China by volume — GM and VW. VW posted strong earnings last quarter and pointed to China as a bright spot because sales on its home continent are still slow and its market share in the US continues to flounder at very low levels.

GM may need its China sales improvement more than any other car company because it is preparing an IPO, in part to pay back money it owes the U.S. government. The largest U.S. car manufacturer may be doing relatively well in the U.S., but sales are still far down from the peaks they reached in 2005 and 2006.

China is the engine of much of GM’s growth, and that engine is sputtering.

Douglas A. McIntyre
24/7 Wall St.