China’s auto slowdown to push spare capacity into export markets

Consumer demand

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Global autos Oct15

Where would the world’s auto industry, and its suppliers, have been without China in recent years?  And how will they manage now China’s demand for new cars is slowing fast?  These are the question troubling companies and investors as Q3 sales are analysed.

The chart above shows the recent history of sales in the Top 7 markets (responsible for ~80% of the global today) between January – September:

  • Without China, sales in the other 6 countries would be up just 3.5% versus 2007, and flat versus last year
  • US sales are up 5% versus 2007, but EU sales are down 6% and Japan sales down 4%
  • China’s commodity boom boosted Brazil and Russia’s demand – now, sales are down 23% and 33% versus 2014
  • India is the great exception – its sales have doubled since 2007, and are up 7% this year – but its volume is only one-seventh of China’s

China autos Oct15

The critical issue is that China’s sales are now slowing fast as the second chart shows:

  • Its volume nearly trebled between 2008 – 2014, from 5m to 14m (January – September)
  • But it has risen just 5% so far in 2015, and sales were actually lower in 3 of the last 4 months
  • Inventories also remain at very high levels at 1.5 months of sales

Even more important is the shift underway from new to used car sales.  As I noted in July, China’s new and used car markets were very small before stimulus arrived in 2009.  Its arrival therefore caused new car sales to rocket.

6 years later, of course, the position has changed 180 degrees.  There are more and more used cars available due to the number of cars sold during stimulus.  And they last much longer, as they have been built with Western manufacturing standards.  Growth in the used car market from now is therefore more or less guaranteed:

  • Currently, the used car market is just half the size of the new car market
  • In most other countries, at least 3 used cars are sold each year for every new car sold
  • Now the bottleneck of poor availability has been removed, China’s market will follow normal trends

China’s dealer association also sees major growth taking place in the used car market.  It now expects 10m to be sold this year, in line with my July forecast:

  • These sales will inevitably cannibalise new car sales, as buyers buy reliable and cheaper used cars
  • So China will have vast over-capacity as it plans to manufacture 30 million cars by 2020
  • In turn, this will lead to a dramatic rise in exports, which the government expects to reach 3m in 2020

Companies never shut down new capacity, as we are seeing with Ford in India.  They over-expanded local production expecting India’s domestic demand would soar, and are now planning instead to export half their capacity.

Nobody else can replace China’s lost demand growth.  So its surplus capacity will end up fighting for market share in an already over-supplied global market.  Car companies and their suppliers need to prepare for savage hits to prices and margins to take place over the next few years.

‘Adapt or die’ seems to be the looming issue.  Companies need to move quickly into the used car market, and develop a more services-led business model that does not just rely on selling product.

One opportunity would be to follow the aircraft industry example, and start to supply garages with 3D printing facilities – and the necessary plastics to print spare parts.  Boeing is already doing this for aircraft, with regulator approval – and the model should be equally successful for cars.

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