Article / 31 July 2015 at 10:30 GMT

China's car market just needs a tune-up

Editor / Saxo Bank
Denmark
  • Car sales in China drop for the first time since February 2013
  • China remains the world's biggest car market
  • Carmakers may need a change in strategy to fuel growth

By Oliver Morrison

China has been a cash cow for premium car brands over the past five years. 

Twenty years ago, the most popular car in China was a humble Xiali sedan, according to the Wall Street Journal.

Since then, it's all been about the bling as a feeding frenzy of newly discovered wealth drove a relentless 'keeping-up-with-the-Wangs' display of ostentation

Just as in US in the 1950s where the larger the wage meant the larger the tail fin, cars in China have become the new status symbol. (Although this does also have practical uses on the chockablock, no-rules roads of urban China, where the bigger the grille, the bigger the chances of other drivers yielding to your path.) 

Now over three-quarters of new sedans sold in China are from foreign marques such as BMW, Volkswagen, General Motors, Hyundai, Nissan, Honda, Toyota and Mitsubishi.  

Xiali, meanwhile, is in the doldrums and struggling to avoid being delisted from the Shenzhen stock exchange. 

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 Display of wealth ... cars have become the ultimate status symbol in China. Photo: iStock

Foot off the gas

But amid China's stock market turmoil, car sales are cooling. Sales rose 9.4% in March, but in June they fell 3.4% year-on-year, according to the China Association of Automobile Manufacturers – the industry’s first drop since early February 2013. The Chinese economy has also recorded its slowest annual growth rate in 25 years.

"We already expected Chinese car sales growth to start slowing in line with the economy, but the slowdown has been exacerbated by the downturn in the equity market," says Anna-Marie Baisden, head of autos analysis at London-based BMI Research. 

"In the early months of the year, consumers were putting money they would have spent on cars into shares instead, which worsened the slowdown in sales, and now many have lost money rather than making gains they could have then spent on cars."

BMI has revised its forecast for car sales growth from 7% to 4.9% for 2015.

Analysts at Barclay's have also recently revised their 2015 outlook for passenger car sales growth. Premium brands BMW and VW have also reported falling sales.

"Premium brands have lost out on two fronts," says Baisden. "First they were impacted by the government's crackdown on luxury spending and now, again, by consumers losing out on the equity market." 

The bubble's burst

Neil Flynn is a China watcher based in Shanghai. He says that people who are wealthy enough to buy a marque car already have one.

"A nice car is the ultimate status symbol in China," he says. "If you drive a BMW, your neighbours will notice. But the economy isn't growing as quickly as it was when the boom began, so you aren't getting the same middle class growth as before."

Like Ford, Flynn is downbeat on the prospects for car sales in the country. "Chinese consumers are still immature in the sense that they look for brand name over quality," he says. "But the evolution that we are seeing is that although these brands are available, more and more consumers are realising that they simply don't need to buy a new car."

Licence plate restrictions are impacting sales

Government measures to crack down on traffic and pollution via regulations (in cities including Beijing, Guangzhou, Hangzhou, Shanghai, Shenzhen, and Tianjin), aimed at limiting the number of cars an individual can own, are playing their part. 

In 2014, there were 500,000 new licence plates issued, but from now on the yearly issuance is limited to 100,000. Prospective car buyers can only buy a licence plate through a monthly lottery system.

“This is adding higher costs to the price of cars in China, which are already high, because of the luxury sales tax," says Flynn. "The average BMW costs 80% more in China than it does in the UK.” 

Flynn adds that the rapid growth of taxi hailing and ride-sharing apps is also giving buyers an alternative to car ownership. The cost of an average journey in central Shanghai is between RMB 20 and RMB 30 he says. "So if you take this journey 10 times a week, extend it over a year or two, it is still much cheaper than actually buying a car."

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 China's car market...too big to ignore? Photo: iStock

The boom isn't over, the market is just maturing

But let's not write off China's car industry just yet. 

Goldman Sachs expects Q3 2015 market growth to remain weak, but it believes there could be a potential re-acceleration in Q4 2015 upon release of pent-up demand. It believes the wholesale-retail gap (6.6% of retail vs. May’s 2.4%) widened in June due to summer stocking. It has also noticed that Japanese and US brands have gained market share at the expense of Korean, European and Chinese brands. 

Baisden believes the market is maturing. "We still believe that by sheer size, China is too big to ignore. The market is bigger than that of the US now, and the low vehicle ownership outside of the major cities means there is still a way to go."

The demographics in China do look promising. There are 52 passenger vehicles per 1,000 people compared with a global average of 150.

Baisden is sure China will still be an important market for premium brands in volume terms. "There are certainly still consumers able to afford high-end goods," she says, "but growth will not be the same as previous years."  

For carmakers, this may require a change in product strategy to find growth. VW, for example, has announced it will develop a low-cost SUV specifically for the Chinese market as the SUV segment is still the main driver of growth. 

"Domestic carmakers with affordable models are dominating the best-selling rankings," says Baisden. Goldman Sachs says the market share of SUVs in China rose to nearly 30% in June. It says Chinese carmaker JAC Motors was up 157.8% in June thanks to strong sales of its S3 SUV model.

"Carmakers can't ignore the Chinese market," concludes Flynn. "It's just that the new normal is that they can't rely on it any more."

– Edited by Gayle Bryant

Oliver Morrison is an editor at TradingFloor.com

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