The above chart was my Chart of the Year last December, under the title “China’s auto sales bubble begins to burst‘. So it seems only sensible to update developments 6 months later.
The key question, of course, is whether my headline was right? Could it be that China was not going to deliver endless growth in auto sales? This seemed almost impossible to some readers and investors. But latest data for May, reported yesterday, showed:
- Auto sales and production actually fell versus 2014, and passenger car sales were up just 1%
- Auto sales also fell in April, and total sales were up just 2.1% in January – May
- May’s passenger car sales growth was the “worst May ever” according to China’s industry association
- This was despite major price cuts, with GM offering discounts of up to Rmb 54k ($8.7k)
The commentary from the industry association was also revealing. They had initially disagreed with my forecast in January, when predicting 7.1% growth for the year. But by March they were suggesting growth could even be negative over the year. As they warned yesterday:
“It is worth noting that both production and sales were lower than the levels last year”.
The reason, as Reuters notes, is the government’s New Normal policies:
“Growth in production and sales of automobiles is indeed slowing down,” said Yao Jie, vice general secretary of the association. “This situation is basically in line with the government’s New Normal in the economy.”
Chinese Premier Li Keqiang describes the economy’s new stage of development as the “New Normal”, a period of slowing growth in which the country must shift to more sustainable drivers of growth.”
The bad news is that even these sales figures are almost certainly exaggerated. China has historically measured “sales” as being shipments from the factory to dealers, not actual sales to buyers. And in recent months, inventories on dealer forecourts have been building to near-record levels as a result, with some holding 6 months of stock.
Sales growth has been particularly disappointing in western China – previously one of the fastest growing regions in the world. Mercedes sales actually fell 7% in Q1, whilst BMW were down 9%. This was a complete turnaround from 2014, when their sales had been up 50% and 36% respectively. As the Wall Street journal notes, only 3 years ago:
“In 2012, Volkswagen unveiled its “Go West” strategy, a key part of its plan to spend $15.8bn by 2016 to expand production in China. The effort included expanding both production and sales in the west. “In Western China in particular, the group is expecting a strong rise in purchasing power over the coming years,” said Jochem Heizmann, chief executive of Volkswagen Group China, in 2013.”
Clearly this major investment is going to struggle to make a return. As are the investments made by suppliers to VW.
What companies seem to have overlooked is that the whole structure of China’s auto market is in the middle of major change. A used car market is now developing for the first time in its history. This will completely change demand patterns.
The importance of this change cannot be over-estimated. We have therefore developed a detailed Case Study of the issue for The pH Report, to be published today. Please contact me if you would like further details of how to subscribe at phodges@iec.eu.com