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Business trends

China's slowdown unnerves German automotive suppliers

Car sales in China are likely to keep sinking, pressuring manufacturers

Volkswagen cars are lined up at the German port of Emden: Germany's auto industry has been hit by a slowdown in the vital Chinese market.   © Reuters

FRANKFURT, Germany -- China's faltering economy is causing angst among Germany's manufacturers, especially its export-driven auto industry.

Most analysts predict another year of slipping sales of new cars in the world's largest auto market in 2019. In 2018, year-on-year sales fell in China for the first time in 28 years.

German carmakers depend heavily on the Chinese market. They are shuddering at the possibility that China's once red-hot economy may continue losing steam.

The global auto market will get worse rather than get better in 2019, warned Wolf-Henning Scheider, CEO of Germany's ZF, a privately held auto parts maker that is the world's fourth largest. Speaking at an April 4 news conference, Scheider predicted this year will be another tough one for the Chinese economy.

Global passenger car sales will slip 1.3% in 2019 from the previous year, according to ZF's forecast, with China's sales dropping 3.4%.

Data for the first two months of the year signaled continued sluggishness in the Chinese market, with car sales in January to February plunging 15% on the year. At the beginning of 2019, many analysts predicted an upturn in the second half of the year that would translate to a small annual gain. But the outlook has since turned gloomier.

A bevy of big German companies have downgraded their earnings forecasts for the year amid a listless Chinese auto market. Infineon Technologies, a chipmaker specializing in automotive product, announced lower earnings estimates on March 27.

Infineon, which makes 40% of its revenue from businesses with carmakers, said its sales for the year through September will grow 5% on year down from 9% in its previous outlook. "The trend of declining vehicle sales in China has accelerated in February, causing dealer inventories to increase sharply," the company said.

On March 28, Osram, a Munich-based maker of lighting equipment for cars, said it now expects sales to drop 11% to 14% for the year to the end of September. It previously predicted zero to 3% growth.

Osram is also sounding the alarm about swelling inventories in China. Its previous earnings forecast assumed orders would pick up in the April to September period. But so far it has not happened, the company said, and it is unlikely to do so before the autumn.

The weakening of the Chinese car market is sending tremors through Germany's auto parts industry, adding to its concerns about the global shift to electric and other alternative-fuel vehicles. These disruptive factors are weighing on the share prices of many German suppliers. Infineon's stock was down 23% from the beginning of 2018 to the end of March this year. Osram has fallen by more than half over that period. The golden age for the German automotive industry seems to have ended.

Arndt Ellinghorst, an automotive analyst at Evercore ISI, a U.S. research specialist, says Infineon and Osram are probably not exceptions. Ellinghorst predicts China's auto production will fall 6% to 9% from the previous year in 2019.

The downshift in China's car market is also taking a toll on output in Europe. German auto production fell 10% on the year to 1.26 million vehicles in January to March, according to the German Association of the Automotive Industry (VDA). Although domestic sales were flat, exports dropped 10%.

The auto industry's woes are starting to affect others as well. Germany's Mechanical Engineering Industry Association (VDMA), comprising 3,000 machinery makers, cut its production forecast for 2019 from 2% growth to 1%. A major factor in the worsening outlook for the sector is the U.S.-China trade war, which is dampening appetite for investment across the board in manufacturing.

At a news conference announcing the forecast revision, VDMA President Carl Martin Welcker pointed to the lingering risk of the trade war intensifying, and said he hoped things would calm down quickly.

The Chinese economy has been sending mixed signals. The official manufacturing purchasing managers index, a key indicator of the health of the sector, rose 1.3 points in March to 50.5, rising above the boom-or-bust 50 mark for the first time in five months, according to the National Bureau of Statistics.

Economists and analysts are divided over whether the Chinese economy has bottomed out, thanks to government stimulus measures.

Shares of both Osram and Infineon have rebounded since the beginning of April. But there is not enough good news yet for German carmakers and their suppliers to stop the hand-wringing over the vital Chinese market.

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