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China’s auto industry heads for a car wreck

Buy a car, get an iPod.

It wouldn’t be a good sign if a U.S. auto dealer were making this offer.

And it’s not a good sign in China either. In June auto sales in China were down for the third consecutive month, according to the China Association of Automobile Manufacturers. And China’s auto makers and dealers ar resorting to everything from price cuts to giveaways to keep consumers buying.

If this sounds like what Detroit did to hold off the collapse of U.S. auto sales, you’re absolutely correct. In China the question is whether this slump in sales will get bad enough to force some of China’s 100 or so domestic auto makers to merge or go out of business.

The buy a car, get an iPod deal is being offered at a General Motors dealership in Zhengzhou, Bloomberg reports.

Actually the offer is to get a chance to win an iPod and it comes on top of a 14% discount off the purchase price and a refund of the sales tax on a $6,170 Matiz compact model.

Car sales in China reached 9 million units in the first half of 2010, according to the China Association of Automobile Manufacturers. That was a 48% increase from sales in the first half of 2009.

But month to month sales have been falling since April and inventories have climbed to 1.3 million units. That’s a 55 day supply at current sales rates and is up from a 41 day supply in February. Wholesale passenger- car deliveries in June increased at the lowest rate in 15 months.

In reaction car makers have cut prices or introduced new models at lower-than-projected prices. China’s National Passenger Car Association has forces that discounts will start to get even steeper in August as car companies try to move inventory ahead of new models hitting showroom floors.

What’s behind the drop in sales?

The government cut the sales tax on small cars to 5% in 2009. That helped produce a huge increase in auto sales in 2009 of 46%. The government raised the tax on small cars this year.

Auto financing has gotten tougher to get as the government works to restrain bank lending after banks blew past the government’s loan quotas in 2009.

And finally China’s economy as a whole slowed in the second quarter of a growth rate of just 10.3% from a growth rate of 11.9% in the first quarter.

This is setting up a potential wreck for the auto industry in China. Sales are slowing from last year’s pace (bringing prices down—average prices of a domestically produced car fell by 2.1% in June from June of 2009—and hitting profit margins even higher as companies introduce sales incentives), but car companies have big plans to add capacity in 2010 and later. Nissan, for example, plans to expand production in China to 900,000 units by 2012. That’s a 68% jump.

Think about the kind of incentives a car maker would have to offer to drive sales up 68%.

An iPad?

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