Booming auto sales slowed by a speed breaker

• An account on China’s car market
• Reasons for the slowing of auto sales

China overtook the US in 2009 to become the world’s largest car market, this was backed by generous government incentives and rising income levels, the former boasted of a fleet of 240 Mn cars at the end of 2018. While the US had about 910 cars per 1000 people, in terms of market penetration, China merely had 171 per 1000. This points out that China is still far from being a saturated market.

With respect to production, China produces about a third of the world’s cars, it manufactured 28 Mn out of the total 98 Mn cars in 2018, which was a whopping 29% of the global production. The country’s annual auto production numbers exceed that of the EU or Japan and the US combined. Even in terms of sales, China’s consumption of passenger cars exceeded that of the US.

Then, what was the reason for a decline in car sales in almost three decades?

Passenger vehicle sales in 2018 amounted to 23.8 Mn vehicles, this was a fall of about 4.1% as compared to the previous year. The total vehicle sales (including buses and trucks) fell by 2.8% to 28.1 Mn vehicles in 2018. This was the first fall which the industry experienced since 1990. The drop-in sales intensified pressure on even the global automakers, which have much at stake through investments of billions of dollars in facilities in China.

Several factors contributed to this decline including the economic slowdown and structural shift in demand. The ongoing trade tension with the US have further dampened the already slowing Chinese economy. The economy was bound to lose momentum from the recurring 10% annual growth at some point in time, but the situation only worsened with the tit-for-tat tariffs imposed by these two nations against each other. Moreover, key macroeconomic parameters have displayed signs of concern, retail sales registered a growth of 7.2% YOY in April, which was much lower than the 8.7% growth registered in March. Similarly, industrial production registered a 5.4% growth, which was significantly lower than the 8.5% growth registered in March. The trade tension with the US has not only hit exports and new investment intentions but it also impacted the consumer confidence, thereby, discouraging citizens from indulging in big-ticket purchases including, but not limited to cars.

Furthermore, China’s generous subsidies which were previously offered to both manufacturers and customers to adopt NEVs (New Energy Vehicles) can also be attributed as one of the major reasons for its non-NEV sales fall. While China has now slashed the subsidy programs especially for small range EV manufacturers, but it seems that the effect of higher subsidies which were offered earlier has been transferred to non-electric automobiles (as more and more companies focused on EV production). Simultaneously, the buyer’s incentive to purchase new cars got diminished with the government ending the rebate on the purchase tax.

Rising property prices, particularly of newly built houses have also led to a fall in consumer spending on cars. House prices depict an increasing trend as can be seen in the below chart. According to the data collected from 70 cities, the average prices of new houses increased by 10.7% YOY in April 2019 after a 10.6% gain in March.

In addition, the ease of ride-sharing apps coupled with better public transport facilities has further discouraged consumers from the purchase of new cars. The country which is known as the world’s largest ride-sharing market and is also estimated to be valued at $23 Bn as per Bain & Co. China is now witnessing a structural shift in demand, one from owing cars to one of convenience, with respect to ride sharing or one of value, with respect to purchasing used cars (especially millennials). This is the reason why contrary to the new passenger vehicle industry registering a decline of 3.5% in 2018, the sales of second-hand cars grew by 11.5% over the previous year. Analysts predict that the used car sales would touch 34 Mn units by 2022.

Unlike most markets, wherein used car sales far exceed those of new ones, China so far has been an exception. The used car industry in China had been in a state of limbo, but all this is beginning to change now. Sales of second-hand cars totalled 13.9 Mn units last year (2018), this was up by a CAGR of 18% after the sales of 3.7 Mn units in 2010. While the US new to used car sales ratio was 150%, this was just 59% for China. Further, China’s used car market is highly under-penetrated and nascent, which poses a significant opportunity for its players.

The sub-par quality of locally made cars limited the options for potential buyers until 2000s. Additionally, potential second-hand buyers had few channels to substantiate a car’s condition or ownership status. Addedly, several local governments did not allow the sales of used cars among provinces to support manufacturers and dealerships, while the central government solely focussed on boosting of new car sales. However, the industry is now going through a transformation. Chinese made cars now meet globally set standards and have a longer life span. Consumers use online tools such as VR apps and HD photos to make purchase decisions at the comfort of their homes instead of having to do so at physical stores. Online car sales accounted for c. 23% of the used car purchases (3.2 Mn units). The prominent e-commerce players now include Uxin, Guazi and Renrenche.

China has acknowledged the fact that there is a fall in auto sales, as part of its slowing economy, and thus, it has again introduced measures to rebound the sales. The government has introduced tax cuts worth c. $289.3 Bn in an attempt to boost consumer spending. Further, VAT would be reduced by 3% for the manufacturing sector. Automakers and dealers are offering hefty loans and discounts to attract customers. In order to compensate for the loss of demand of new vehicles, China’s Ministry of Commerce has recently allowed for exports of used cars from 10 provinces and cities including the likes of Beijing, Shanghai among others. However, in spite of these measures, Televisory feel that the ongoing trade tension with the US in a broadly subdued economic environment may continue to weigh the sector in the short-term.