Consumer demand for vehicles in the next few months will be weaker than at the beginning of this year, according to the 2014 China Auto and Auto Parts report released on Wednesday by UBS Securities Co Ltd.
Passenger vehicle shipments will expand 11.8 percent in 2014, and sales of all types of vehicles will rise 10.7 percent, the report said. Production capacity for passenger vehicles will increase 12 percent this year.
The contribution to sales by coastal cities, which have been leading growth in Chinese vehicle sales, is reaching a "tipping point" of about 55 percent. UBS said that the contribution of these cities will cease its rapid growth, and inland regions will start to take a larger market share.
In terms of absolute purchasing power, China can theoretically post another decade of annual growth of 15 to 20 percent for vehicle sales, based on what happened in Japan and Europe.
In those markets, auto sales rose exponentially when the average price approached three times per capita GDP, explained Hou Yankun, head of Asia auto research at UBS.
"Such rapid growth is very hard to sustain, largely due to the serious smog ... plaguing most of China and the traffic congestion. People will get the idea that it's better to use mass transit as much as possible," said Hou.
According to Fourin Inc, a Japanese research firm specializing in the vehicle industry, there are more than 700 cars for every 100 kilometers of road in Beijing. The number is about 400 in Shanghai. There are 300 cars for every 100 km of road nationally.
"It can be expected (within four years) that there will be some 600 cars for every 100 km of road. But the roads won't expand accordingly. Therefore, infrastructure will be the bottleneck for the continuous rapid growth of China's automobile industry," said Hou.
As the inventory of passenger vehicles and prices of bulk commodities such as steel will remain steady in 2014, it can be expected that the profits of the Chinese vehicle industry will be largely unchanged this year, Hou said.
However, shares of listed vehicle producers have been underperforming because investors have lost some confidence in the country's economic outlook. Many investors have also shifted focus to technology, media and telecommunications companies, as well as the pharmaceutical sector, which they think offer steady growth.
With the success of Tesla Motors Inc's vehicles, China is moving faster to develop the electric vehicle market. A number of favorable policies are supporting the sector, such as more subsidies in a larger number of cities and opening the market in Beijing and Shanghai to EVs produced elsewhere.
Shanghai's first charging station, built by Shanghai World Expo (Group) Co Ltd and State Grid Shanghai Municipal Electric Power Co, opened on Wednesday.
However, according to a report by consulting firm Roland Berger Strategy Consultants Holding GmbH, China has "failed to show any technological progress at all" in terms of EVs.
"We can see that the authorities have plans for electric vehicles. If China can succeed in this area, it can achieve the goals of industrial upgrading and controlling pollution.
"Current technology can be commercialized, even though it's not very advanced. As a result, electric vehicles sold now do not have an ideal cost performance," said Hou.
"If the industry is to thrive, consumers should change their habits voluntarily", without regard to subsidies, Hou added.