70% of China’s auto dealers unprofitable, as lending curbs bite

Consumer demand

SHARE THIS STORY

EU, China autos Dec14Would 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.

 

 

 

 

PREVIOUS POST

IEA says oil price collapse could lead to "social upheaval or financial difficulties" in H1

16/12/2014

Today’s collapse of commodity prices has the potential to cause a major fi...

Learn more
NEXT POST

Oil prices, Russia, open new fault-lines in the 'Ring of Fire'

18/12/2014

One by one, the fault-lines are opening in the debt-fuelled ‘Ring of Fire&...

Learn more
More posts
The Top 5 pandemic paradigm shifts
28/06/2020

The Covid-19 pandemic has accelerated the fundamental changes which were already underway in global ...

Read
Hertz goes bankrupt as non-essential consumer demand disappears
24/05/2020

The US Federal Reserve has now spent $7tn bailing out Wall Street. But it couldn’t save the 10...

Read
Smartphone sales head into decline as affordability becomes key
10/05/2020

The smartphone sales decline accelerated in Q1, as Strategy Analytics report: “Global smartpho...

Read
China’s plastic ban and recycling launch marks end of ‘business as usual’ for plastics industry
26/01/2020

Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly ...

Read
Automakers face stiff headwinds in big emerging markets
19/01/2020

Brazil, Russia, India and China disappoint as manufacturers face investment demands of EVs © Bloomb...

Read
Portugal shows the way to climate neutrality by 2050
24/11/2019

“If you don’t know where you are going, any road will do”. The Irish proverb’...

Read
The next billion phone users will be buying $10 smart feature phones, not $1000 iPhones
10/11/2019

Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows....

Read
Companies ignore the Perennials 55+ generation at their peril
13/10/2019

Nearly a third of the the world’s High Income population are now in the Perennials 55+ generat...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more