China’s new vehicle market hits a bump in the road

A new Greenstreetsoftware.info report paints an optimistic long-term picture for new vehicle sales in China. By Martin Kahl

Much has been made of the slowdown in China’s car market. Is this a hint at a new normal for new car sales in China? Should foreign automakers operating in China—and dependent on that market—be worried? What will happen to the global automakers’ local manufacturing investments and joint ventures, and what are the implications for global suppliers with so much invested in China?

According to the China Passenger Car Association, which counts customer deliveries of passenger cars, SUVs, minivans and light commercial vehicles (LCVs), the market shrank by 18.5% to 1.19 million units in February. Its data for January and February combined shows a 10% decline at 3.37 million units.

Analysis by Greenstreetsoftware.info shows that China’s light vehicle (LV, <6t GVW) market fell 3.4%, or 0.98 million vehicles, in 2018 to 27.6 million units. The market is of course critical to a number of major automakers—notably the three German premium brands, for whom China is a significant source of revenue. And in terms of heavy vehicles (HV, >6t GVW), sales fell by 3.2% from a peak in 2017 to 1.47 million units in 2018.

Understandably, the global automakers are concerned. Having invested so much in their China market presence, their business models depend on a strong Chinese car market.

They also need certainty, something that appears to be in short supply as trade talks drag on between the US and China, and various other markets look increasingly unstable. Furthermore, Chinese car buyers have been hit by the ending of a tax reduction and credit restrictions.

From Belt and Road to tightening belt

Alongside the slowdown in new vehicle sales came news of a slowdown in the economy, in the shape of the government’s annual economic review and the cautious 2019 targets announced by the country’s Prime Minister, Li Keqiang.

In early March, Li announced a GDP target for 2019 of 6-6.5%, down from last year’s target of 6.6%, with Li attributing what would be the country’s slowest growth target in almost three decades to threats from abroad.

Vittoria Ferraris, a director at S&P Global Ratings believes that, “despite easing in fiscal and monetary policy in China there are no tangible signs of economic recovery in the region.” Ferraris added, “Market saturation in affluent Chinese cities has overlapped with a loss of confidence among consumers in smaller cities. Our sense is that the government may take a harder stand on incentives and look to address industry overcapacity by forcing some consolidation.”

To add further confusion, official economic data from China cannot be taken on face value. Analysts allege that China’s official data is manipulated to present the economy however the government wishes—The Economist reported recently on research by Chang-Tai Hsieh of the University of Chicago and co-authors from the Chinese University of Hong Kong who say they have identified historical overstatement of GDP growth that would have exaggerated the size of the economy; at the same time, by looking instead at “consumption as an engine of growth”, it could be argued that the economy’s health might be slightly “more resilient” than the government is indicating.

Dissatisfaction

This, of course, has significant implications for the true state of the Chinese economy, crucial for companies seeking to do business with, or in China. The future trading relationship between the EU and Japan is clear, the EU-Japan Economic Partnership Agreement having come into effect in February. Much less clear is the trading relationship that Europe and the US can expect to enjoy with China; as talks between Washington and Beijing limp on, the EU is expressing its growing dissatisfaction with China. A recent paper published by the European Commission raises concerns about China’s state-subsidised overseas investments, the motives behind its Belt and Road strategy, its ambitions in the South China Sea, and the country’s treatment of European businesses. Provocative or retaliatory measures—including tariffs, non-tariff barriers, operating restrictions on companies or industries—would sound alarms for any global company whose business relies on China; and few industries have as many global stakeholders reliant on China as the automotive industry.

However, reports of the country’s declining car and truck markets may have been somewhat exaggerated. A new Greenstreetsoftware.info report on the prospects for China’s new vehicle market over the next five years acknowledges a downturn, but paints an optimistic picture longer term.

Although the heavy commercial vehicle (HV, >6t GVW) market has suffered a downturn, it is still at its second-highest ever level. A pre-buy effect ahead of a new emissions standard will support sales in 2019, followed by a fall, and recovery in the final three years of the forecast period.

The outlook for LV sales is also good. “At the time of writing, vehicle sales in China have fallen for seven consecutive months and we anticipate at least another couple of year-on-year declines in the monthly data,” said Jonathan Storey, author of the Greenstreetsoftware.info report. “While this has generated many gloomy headlines,” he continued, “we characterise it as a mild decline in a market which is maturing, but still expected to trend upwards—soon exceeding 30 million units.”

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