OREANDA-NEWS. China's passenger vehicle (PV) market is entering a new phase with annual sales volume growth slowing to mid-single digits over the next decade, Fitch Ratings says in the latest publication of its blue book series on Chinese corporate sectors.

China's domestic automakers, both Chinese-foreign joint ventures (JVs) and indigenous brands, will face intensifying competition in the world's biggest PV market with product, pricing, and marketing strategies becoming increasingly important differentiating factors for success.

The new growth stage is driven by slowing demand in top-tier cities amid a maturing market and rebalancing in China, a shift in regulatory focus from short-term consumer stimulus towards new-energy vehicle (NEV) development, and restrictions to contain vehicle numbers in more Chinese cities for environmental reasons.

However, the market's long-term drivers will remain intact. Overall growth will continue to be driven by ongoing urbanisation, rising household income, improving highway infrastructure as well as the "Chinese dream" of car ownership and of upgrading to better-quality vehicles. China's PV density, currently around 80 vehicles per 1,000 people, could rise to around 150-200 in the next two decades, despite the overall size and diversity of the population.

Fitch expects that demand from top-tier cities will be mainly for replacement and consumer upgrades to high-end and pricier vehicles, while most of the demand in the faster-growing lower-tier cities will be for mass-market models that target first-time, entry-level buyers.

As demand in Tier-1 and large Tier-2 cities slows, Fitch expects competition to intensify in lower-tier cities. Some JV automakers in rapid capacity ramp-up mode could start a price war by prioritising market share over profitability. Chinese brands would defend their market shares by focusing on the faster-growing segments of low-end sport utility vehicles (SUVs) and multi-purpose vehicles (MPVs), where competition is set to increase with the entry of JV competitors.

Fitch expects the large state-owned automakers to maintain their leadership in China's auto market with their diversified portfolios of JV brands and products. The "big five" state-owned auto groups accounted for 74% of unit sales of automobiles in 2014 in China. The majority of their revenue and profit is likely to continue to come from their JV operations, as the scale and profitability of their self-owned brands may stay limited in the near to medium term.

On the regulatory front, China's auto market regulators have introduced stricter vehicle emission standards and pro-NEV policies to combat air pollution, offering growth opportunities for "greener" vehicles produced by Chinese brands. The ongoing anti-monopoly investigations against foreign makers could put downward pressure on the pricing of overseas brands, intensifying competition for Chinese brands already at the cheaper-end of the product spectrum.

Fitch's report, titled " China Automotive Sector Blue Book: Onset of the New 'Normal'", is the latest in a series of Fitch China Research Initiative publications dedicated to providing comprehensive, in-depth research and insight into the key credit aspects of corporate sectors in China.