China Market Growth Slowing ‘Faster Than Expected’
A study by CLSA Asia-Pacific Markets calls for retail sales to rise only 1% this year, an anemic pace compared with hyperleaps of 46% in 2009 and 32% in 2010.
This is not shaping up as another record year for vehicle sales in China.
At midyear, the Chinese Association of Automobile Manufacturers cut its growth forecast of vehicle wholesale deliveries to 5% from 10%-15% for 2011.
Dealer offering discounts up to RMB5,000 on VW Polo.
And in recent CLSA Asia-Pacific Markets studies, Beijing-based analyst Scott Laprise calls for retail sales to rise only 1% this year to 18,261,393 units. That still leaves China as the world’s largest automotive market, but the year-over-year gain is anemic compared with hyperleaps of 46% in 2009 and 32% in 2010.
“Sales are slowing faster than expected,” says Laprise, who earlier foresaw 9% growth in 2011, “and the lower-end players are likely to get hurt more than the top companies.
“Market sentiment is changing due to rising gas prices, up 14%, higher borrowing costs and overall tightening in the economy, which will cause consumers to delay purchases. And profits will be impacted by rising raw-material prices and price pressure from the domestic auto makers.”
He emphasizes the importance of market sentiment, because Chinese consumers, unlike those in the U.S., do not need to buy a car. Public transportation is cheap and plentiful, and car purchases are made more for convenience and status.
Especially hurtful for sales was the termination this year of a major government prod, the tax rebate for cars with engines displacing 1.6L or less, which comprised 5% of the market in 2009 and 2.5% in 2010.
The price-sensitive 1.0L-1.6L segment soared 69.1% in 2009 and a healthy 26.2% last year, Laprise points out.
“As the Chinese auto market becomes more mature and the growth rate slows, surges in fuel prices will begin to have a negative influence on vehicle purchases,” he adds.
The CLSA studies note the slowdown in vehicle purchases is dominated by the small minivans often used by farmers and other low-cost transporters and is spreading to the inexpensive cars of domestic makers.
At the beginning of the year, BYD cut prices up to 19% on 95% of its models, and there is concern other low-end auto makers may follow suit. BYD and Chery already are showing slower car sales and the early signs of a price war.
The market deceleration is expected to spread to the small-car sales of joint-venture auto makers and then to their larger sedans, before finally reaching the luxury-car segment around the end of the year.
What reconfirmed Laprise’s pessimistic outlook for near-term sales were recent visits to six dealers in Shanghai and three in Chongqing, which offered grass roots glimpses of buyer sentiment for a range of vehicles from the low to the top end of the market.
Overall, he found JV brands were doing better than domestics, although both showed some slackening in sales month-on-month.
“Car penetration in coastal cities is reaching a peak and this year strong growth in car sales was expected in China’s interior cities, so it was surprising to find car sales slowing there where penetration is only at the beginning,” Laprise says.
In Chongqing, shortly after a major local auto exhibition, sales staffs complained about tough selling, especially for low-end models:
A Dongfeng Citroen dealer reported June sales better than May’s, but only half that of the prior year’s monthly levels of 300 cars, and salesmen were worried demand could drop further.
A Shanghai Volkswagen dealer failed to reach the May sales target of 600 units but hoped the local auto show would help meet the June target of 700.
A BAIC Mercedes-Benz dealer said sales were better than last year, up 158% in January-May to 25,872 units, with E-Class sedans the best sellers.
“What’s most worrisome is the interior market, where most auto makers foresaw good growth. The recent visit to interior dealers showed early signs of weakness that is likely to continue for at least the next quarter,” Laprise concludes.
In Shanghai, where overall dealer sales were down month-on-month and, in some cases, year-on-year, he found concerns about lower margins for second-half 2011:
%With monthly sales slowing, a Shanghai Volkswagen dealer was offering discounts of RMB3,000-RMB5,000 ($465-$776) on the Polo. He said fewer than 5% of his customers requested a loan and the rest paid cash. The new Passat was attracting attention, and he expected sales to pick up in September.
Sales staff at a DFM Nissan dealer said sales were down about 10%, and customers had to wait roughly 30 to 45 days for deliveries because the Japan earthquake had reduced inventories.
Although an FAW Toyota store was empty, the dealer was not offering discounts but was asking for an extra RMB100,000 ($15,552) for out-of-stock imported models and hoping to re-stock shortly.
/No customers were present during a visit to a Chery dealer, where salesmen complained about sales, down 15%, and pressure to offer discounts up to RMB10,000 ($1,552) for all models. The base QQ, Chery’s cheapest model, was selling for RMB30,000 ($4,658) – less than the cost of a Shanghai license plate.
A Great Wall dealer reported flat sales in June vs. May and a sharp drop in demand for SUVs, despite discounting. Although the company’s first small cars have been a failure, midsize sedans were selling well.
Sales at a Geely dealer were down 5% month-on-month. Low inventories were being replenished, discounts were available and customers could take immediate delivery.
In addition to complaints about the lost tax rebate and rising gasoline prices, Chinese motorists are unhappy about high parking costs, poor road conditions, increasing traffic congestion and government curbs on car sales, such as the monthly sales cap of 20,000 vehicles recently imposed on buyers in Beijing.
Counterbalancing these complaints to some degree is the expectation fuel prices will fall later this year and tolls may be lowered on some urban roads.
“The government is not likely to stand by and watch auto sales, which represent 7% of gross domestic product, continue to be poor,” Laprise says. “Some positive policies to stimulate demand will likely be implemented in the fourth quarter of the year.”
Although gloom currently overshadows the Chinese auto market, there are no hints of doom. Laprise is forecasting a 16% upturn in retail sales next year to 21.1 million units, followed by a 13% rise in 2013 to 23.8 million units.
He predicts further increases of 14% to 27.2 million units in 2014, and 15% in 2015 to 31.3 million units.
What impact the current financial tumult in the U.S., Europe and Japan may have on China and its automotive industry is not clear. Yet, however much or little the fallout may be, the halcyon days of hypergrowth appear to be over for auto makers in China.
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