Would anybody have believed these charts, if one had presented them as a forecast for auto sales a few years ago? Clearly not:
- Everyone knew that Europe was one of the world’s top 2 markets, and China was very small
- Europe’s average incomes were around $40k, whereas China’s were less than $5k even in the cities
Yet today, conventional wisdom tells us China will remain the word’s largest auto market forever. How realistic is this, as a forecast for the future?
We can certainly be reasonably confident that Europe’s sales will depend on stimulus efforts. The chart shows how this boosted sales temporarily in 2010, before volumes fell back again in 2011. But the EU’s ageing population means it has been unable to sustain this sales level:
- Instead, individual countries such as Spain have done major stimulus from time to time
- Its sales are up 17% in 2014, for example, due to this support
- But Germany and France have given up on stimulus for the moment
- Their sales are up just 1% – 2%, despite average manufacturer discounts of 18% – 20%.
Yet China’s sales have surged ever-higher, almost in a straight line. The difference is that its stimulus has been far larger, and has lasted far longer. Sales jumped 49% in 2009, followed by 35% in 2010.
Suddenly people forgot what they knew pre-2009 about China, and it became instead “the big new thing”. Sales would always keep growing in a straight line, and China would reach Western middle class income levels within a decade, or maybe even sooner.
But look more closely, and warning lights are flashing red about the underlying state of China’s auto market, as the country enters President Xi’s “New Normal” economy:
- China records auto sales as shipments to dealers, not as sales to end-user customers
- Its dealer network has expanded 30% since 2011: and manufacturers force all dealers to keep high inventory
- Inventories at the dealer level average 47 days/per dealer, about the same as 2013
- The Dealers’ Association says 70% of dealers are unprofitable this year, up from 30% last year
So just how fast is China’s auto market really growing this year, at the retail level? Is it growing at all?
We can’t know, as the data is never published. But simple mathematics suggests a large part of the apparent growth this year is due to new dealers have to build inventory to start their business. And the cries of pain from dealers over profit margins suggest the end-user market is very tough. Thus the Wall Street Journal reports the Dealers Association chairman as saying:
“Many dealers have come under huge financing pressure. They have to sell cars at great discounts.”
The problem for the dealers is that they risk losing their investment in the dealership if they fail to buy at least 50% of their sales target. So it appears many are preferring to sell at a loss, rather than just give up. But with financing becoming ever more difficult, as Xi bursts the lending bubble, it is hard to believe this is a sustainable strategy.
As China’s auto sales go back to being based on income and not the lending bubble, it is unlikely that volumes can stay anywhere close to current levels.