China’s used car market set to drive future auto sales growth

Consumer demand

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China autos Apr15aChina’s auto market is going through major change.  Tier 1 cities have imposed limits on car ownership, and car use by government officials is being severely restricted.  In addition, the lending bubble that drove major growth in recent years is coming to an end.

Perhaps even more importantly for the medium term, a used car market is now developing in China for the first time, as the chart shows:

  • Auto sales only began in China relatively recently: there were just 16m cars on the roads in 2000 (green column)
  • New car sales rose to 4m in 2005, and then accelerated to 14m by 2010  due to the post-2008 stimulus (blue line)
  • The total auto fleet thus doubled from 43m in 2005 to 91m by 2010, and then reached 154m last year
  • Now, new car sales are slowing, with volume up just 8% in 2014 to 19m and forecast at only 7% this year
  • Instead, used cars are the major growth area, with sales up 16% in 2014 at 6m – double new car growth (red line)

Used car sales have been slow to take off, with just 1.5m sales in 2008.  But this is now changing very fast, as higher quality, longer-lasting foreign brands now dominate new car sales.  German brands had 27% market share in 2014, versus just 22% market share for domestic brands.

These higher quality cars are now starting to be resold, after the typical 5-year initial ownership.  And so used car volume is expected to soar to 11m this year, according to China’s Auto Dealer Association (CADA).  These sales are being supported by major foreign manufacturers such as BMW, Audi and Volvo.  They have developed Western-style certification services to guarantee the quality of used cars, which will cover 30 cities by next year.

Used car sales are also proving an attractive revenue stream.  Audi saw 34% growth in used sales last year, whilst dealers are gaining good profits from used car sales and servicing.  These areas are proving far more attractive than new car sales, where 70% of dealers were reportedly unprofitable last year.

China’s auto market will now see major change as a result.  Used car sales were just one-third of new car sales in 2014, but this proportion is expected to rise to 50% this year.  And CADA expects this momentum to be sustained for the next few years, as used car volume in markets such as the US is typically twice the size of new car sales.

Chinese investors have been quick to pick up on this shift in demand patterns.  Online used car retailer Uxin easily raised $170m last month.   Its service-led business model based on the internet is expected to prove very popular.

But for every winner, there are likely to be many losers in established industries, as China continues to refocus the economy on its New Normal policies.  Those still hoping for a return to stimulus levels of new car sales growth are going to be sadly disappointed.

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