Its not a good time to be selling new cars in China. As the chart shows:
- Sales fell 2% in Q2 (red line) versus 2014 (green), with June down 3.4%
- This is the first time sales have fallen in a quarter since Q1 2011 (pink)
- China’s auto dealer association said customer visits to dealers “dropped sharply in H1”
- Inventories continue to grow and are at 50 days of sales, even though operating rates are below 70%
- Inventories for imported cars are at 143 days, compared to normal levels around 30 days
Contrary to many media reports, this is nothing to do with the stock market crash – which only began in mid-June. The sales downturn has been going on for months, as part of China’s switch to its New Normal economic policy direction. Thus BMW’s Chinese partner, Brilliance, yesterday forecast a 40% drop in H1 profit.
As always, slowing sales have led to price cuts. These began over the peak holiday season, according to the official CCTV station. Analysts JATO Dynamics report average prices are now 40% below official selling prices at Rmb170k ($27k). Even German brands are offering 15% discounts, whilst GM has cut prices by up to 20% to maintain volume.
Auto market developments highlight a wider trend in the economy. This will not be reflected later this week when China reports its official GDP level for Q2. But as the former head of the UK’s secret service, MI6, told the Euromoney conference last month, China’s real level of GDP growth today is probably only 3% – and falling. As Premier Li said long ago, the official number is “man-made and therefore unreliable“:
- How could China possibly collect all the data and process it in just 2 weeks from the end of the quarter?
- It takes developed countries such as the US at least 4 weeks to publish a first estimate
- Even more revealing is that China’s data is never revised – yet other countries take years to finalise the figure
Common sense suggests that the bursting of the property and stock market bubbles is bound to hit markets such as new cars and luxury items, that have depended on a wealth effect for their sales. Instead the government is focused on promoting the services sector via its mobile internet strategy.
As I discussed recently in the Financial Times, this change of direction is another reason why the new car market is struggling. For the first time in China’s history, buyers have an option to buy a cheaper used car. And those manufacturers and dealers who have adapted their business models to China’s New Normal will now profit instead from used car sales and servicing revenue.