China’s auto dealers cut prices as inventories rise

China auto Aug12.pngAll is not well with China’s auto market. On the surface, as the chart shows, sales appear to have picked up after January’s poor performance:

• Q1 sales (red line) were flat versus 2011 (green)
• Q2 sales were up 12%, due to a strong May and June performance

But….

• It is unclear if these increased ‘sales’ are real
• China measures retail sales when cars leave the factory
• Auto inventories are now 2.2m, versus 1.3m at the start of 2012

If inventory levels were normalised to the 1.3m level, then sales are actually down 6% YTD, instead of being up 6%.

Further evidence for this analysis is the wave of price-cutting now underway. Even China’s best-selling vehicle, the Buick Excelle, is being offered at a 25% discount to list price (RMB 139k, $20k). Whilst China’s official National Development and Reform Commission says “facing sluggish demand and rising inventory, dealers will increase discounts and incentive offerings in the coming months.”

More cities are also now joining Beijing, Shanghai, Guiyang and Guangzhou in limiting car purchases. Xian is the latest, showing that the trend is now spreading to second- and third-tier cities. The reason is the vast traffic jams, which would require enormous investment in new roads and highways to solve.

Thus China’s domestic producers are instead focusing on export markets. This is likely to hit existing players hard, as China’s prices are extremely low. Its exports were up 28% in H1 at 488k, with May and June each seeing >100k sales. But even this area has its difficulties.

23k cars in the fast-selling Chery and Great Wall model ranges have been recalled in Australia due to the use of asbestos in engine and exhaust gaskets. This is still common practice in China, but illegal in most Western countries.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

,

2 Responses to China’s auto dealers cut prices as inventories rise

  1. Thom 21 August, 2012 at 9:40 am #

    Paul, I’m pretty bearish China but am not sure those auto sales are that bad. Wouldn’t we expect the seasonal pick up in demand in Aug and Sep? Maybe that just means we clear the inventories. I’d love to see some more history on Auto Inventories.

  2. Paul Hodges 22 August, 2012 at 8:42 am #

    Thom

    You may well be right. That was why I tried to put both sides of the argument:

    • Sales may be up 6%, if the numbers are accurate
    • They may be down 6% if the build in inventory is abnormal

    As with most things in China, we don’t know the real story. Unlike in the West, inventory figures are not published routinely each month.

    Possible straws in the wind, however, are the constant reports from the Chinese people I meet, and from the Chinese press, about demand being slow. This has been a pattern for the past 6 months.

    The last time I remember this happening was in 2001. So that’s why I’m trying to highlight the uncertainty. As you say, August and September sales will give us more clues.

    Thanks for the comment.

    Paul

Leave a Reply