While Chinese new car sales rose more than 15% in July, questions have been raised about whether the industry has been overproducing and could be heading for a slowdown, becoming even more dependent on government incentives and dealer discounts. Carmakers in India, meanwhile, continue to see the domestic market grow at very strong rates, but production may be well under supplied and below current demand levels.
Passenger car sales in China were more than 800,000 in July, according to the China Automotive Technology & Research Center, with overall sales more than 1m units. However the sales have been driven by increasing incentives by dealers as well by more incentives by the Chinese government, including subsidies of RMB 3,000 ($443) to promote purchases of fuel-efficient models. The centre predicted that rising vehicle inventories could lead to weaker growth in August. An analyst from the Daiwa Institute of Research in Hong Kong told Bloomberg that monthly car sales may start to fall from year-earlier levels as early as September.
Some carmakers, such as Ford, have already reported small declines in July sales compared to last year. Chinese OEM BYD has now cut its sales target to 600,000 units, down from 800,000.
The domestic car output exceeded sales by 1.29m vehicles in the first half of the year, according to the centre, and inventories continued to rise in July as production remained higher above sales. The average stockpile period–defined as the time between vehicle production and registration–lengthening from 55 days in June to 58 in July. As well as increased inventory, that may also be a sign of a less than efficient vehicle logistics chain.
While automotive production may have continued to rise even higher than demand, there are signs Chinese factories are ready to pullback slightly, particularly with demand in other markets dampening exports. China’s overall July manufacturing data revealed it to be the weakest month in more than a year. A purchasing managers’ index by HSBC revealed a contraction in manufacturing between June and July, while a government-backed measured by the Chinese Federation of Logistics and Purchasing showed only a mild increase.
On the other hand, the country may face supply shortage in some area. Frbiz, a supplier search platform, published an analysis this week that suggested supply was particularly short on imported components as well as aftermarket parts, without naming sources or specific manufacturers. The report suggested that production could be affected in the second half of the year as a result.
However, current inventory and manufacturing levels suggest that the latter part of the year could see China throw up even further discounts and incentives to turnover sales. That scenario, together with the recent strikes against low wages, and a looser but still highly undervalued RMB, are another reminder that the world’s largest market for new cars remains highly dependent on the government for support. 
India is looking for the goods
In India sales and production have risen at breakneck speeds, increasing year on year by more than 30%. But the supply situation in India appears to be more clearly that of a shortage than excess. With Maruti Suzuki, the country’s largest carmaker, seeing gains of around 33% in June, the company is ramping up production and seeing high capacity use across its supply chain. According to Mint, a business newspaper in India, raw material providers, such as steel companies, are producing at capacity rates around 90%, and many have plans to expand along with carmakers’ expansion.
Maruti, meanwhile, has said it is as much as 20% under supplied on almost all models. It has also reported rising prices in the supply chain in its first quarter of the new financial year starting in April. Material cost rose to 79.6% as a percentage of sales, from 77.9% in the previous quarter, following rises in commodity prices. Manufacturing expenses have increased as well, rising to 7.7% (from 5.4% in the previous quarter) with notable increases in power and fuel.

Mahindra & Mahindra, meanwhile, saw new car sales rise by 24% in July 2010 compared to last year. But in an earnings call last week, Pawan Goenka, the president of Mahindra for farm and automotive, revealed that sales in the quarter ending in June would have been at least 7% higher, but the company faces shortages of parts including tyres, casting components and fuel injection parts. All signs point to large increases in output and capacity for the rest of the year at all levels of the Indian supply chain.