China Watch: Top Brands, Low-Polluting Cars to Take Lead

TAIPEI, Taiwan (TheStreet) -- Here are some more numbers that show China's economy going from the fast lane to the slow lane: Auto sales in the world's top vehicle market rose 9.9% year on year in June, a drop from 16% year-over-year growth in May, the China Association of Automobile Manufacturers says.

But some automakers will see sales surge in the years ahead. Who are they?

First the history: Starting in the mid-1990s, China encouraged its people to buy cars as evidence of national wealth to a then-skeptical outside world. Officials once offered purchase incentives as pundits in cities such as Beijing gloriously pronounced that cars had replaced bicycles as the primary means of transportation.

Some of those leaders backed up their encouragement by offering subsidies for automakers as well as buyers. But they didn't realize until it was too late that they should have redesigned urban roads (not just add super highways) and re-educated drivers on common anticongestion etiquette to match the increase in vehicle use.

The consumerist rite of passage showed signs of an unstoppable surge around 2002, and today angry drivers often go as far as driving on sidewalks to bypass traffic.

As a result, major Chinese cities have started saying "enough" as pollution and congestion become unmanageable. Who-can-drive-when rules and other bans have followed, slowing June auto sale growth to a total of 1.58 million units.

Drivers also threaten China's energy sources, a concern for economic planners. Of China's 8 million barrels of oil consumed per day, 40% goes to transportation, the Chicago-based International Association for Energy Economics said in a 2010 report on China's automotive industry.

The government is desperately looking around the world for new oil resources to keep supply lines open.

Says the nonprofit association's report: "The question is how much the vehicle fleet will grow before the energy constraint becomes too severe."

Slack sales growth has raised inventories to uncomfortable levels, and local governments may restrict vehicle sales to reduce traffic congestion, warns Sharon Wong, Asia equity research director with S&P Capital IQ in Hong Kong. Average inventory was more than two months as of the end of May compared to 45 days a month earlier, a China Automobile Dealers Association representative says.

"Many (automakers) thought China had passed a critical point in its development, which meant that the ranks of families with enough money for a cars was taking off," recalls Mark Williams, chief Asia economist with Capital Economics in London. "Now, dealerships are struggling to shift their stock even with generous price discounts, and the industry as a whole is struggling to deal with a massive increase in production capacity."

Chinese Will Keep Buying Cars Anyway

But like China's overall economy, also said to be slowing, automotive sales are still in growth mode, meaning someone out there will keep selling cars, and probably a lot of them.

Keep faith in the vehicle makers that remain popular purely for their brand names. Then study the ones that are keen on changing to fit new consumer tastes or tougher rules of the road.

Driving the big brands in China confers status and generates free word-of-mouth advertising, a foolproof formula as long as the vehicles don't break down. The big brands in China tend to from the U.S., due to the U.S. auto industry's long history of investments in China.

China's best-selling passenger car from January through May this year was the Buick Excelle by Shanghai General Motors. The five-door hatchbacks sell well in China -- 253,400 units moved last year -- because of its smallish size and Buick's historic name recognition among Chinese consumers.

General Motors ( GM), which is on a turnaround course from bankruptcy, is growing in general, and the Shanghai joint venture will only help that cause. Its share price has fallen 43% over the past two years, but because of macroeconomic and automotive industry problems far from China.

Less Gasoline, Less Pollution

As the decline in sales growth follows local regulations to ease congestion and clean the air, it's no surprise that electric vehicle sales in China are set to grow. Their numbers will reach 152,000 units per year by 2017, according to Pike Research in Colorado. That's up 60% from this year, although it's behind the government's target of a half million by 2017, the research firm said.

China aims to increase the use of hybrids and plug-in hybrids but has struggled to put that goal into practice, Pike Research notes. Specifically, fragmentation of local governments and their obligations to local makers of traditional vehicles have held up any mass release of low-pollution cars.

So give the transition to electric and hybrid vehicles another 10 to 15 years. Unfortunately, it will be driven by even greater congestion and urban air pollution.

But more progressive cities -- the hazy major southern metropolis of Guangzhou, for example -- will step on it sooner. That effort may curb growth in traditional auto sales but would hand opportunities to electric car makers such as BYD Auto, part of Shenzhen-based BYD (1211.HK). Its share price has been volatile but remains above IPO levels of last year.

Nissan ( NSANY) Leaf cars are also being tested in China this year, with the China Car Times reporting that the electric vehicles have Guangzhou's support.

Nissan plans to build a factory that can make 600,000 cars per year as well as a battery assembly center in China, according to China Car Times.

Nissan share prices have risen more than 20% over the past two years despite a sharp fall during the global market slump in August 2011.

And never underestimate Ford Motor ( F). The U.S. automotive giant introduced its Fusion model hybrid vehicles in China in January, contributing to 24% year-on-year sales growth in April for all models sold in the country. Ford share prices have slipped 28% over the past two years, due mainly to problems in the U.S. economy.

But to pick what might prove to be the strongest investment in China's transportation sector, look at electric bikes. They're cheaper than cars, and a lot of Chinese streets already support bike lanes from the days when more people pedaled than drove.

Giant Manufacturing (9921.TW) made 320,000 e-bikes last year, and 250,000 were sold in China. The Taiwan-based bikebuilder says it hopes Chinese consumers will become less "price sensitive" and buy higher-quality bikes. Giant's share price has tripled since 2009.

At the time of publication, Jennings held no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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