China’s car market: triple shock ahead

Consumer demand

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Auto manufacturers, their suppliers and investors need to prepare themselves for a triple shock from China’s slowing economy, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
Autos BRICs Nov15
The first shock is already under way. As the chart shows, China’s slowdown has caused passenger car volumes to decline in the Bric economies – which accounted for one in three global sales last year. Volumes in Brazil and Russia have collapsed as their commodity exports have tumbled: Brazil’s sales are down 23 per cent and Russia’s down 33 per cent (January – September 2015 versus 2014).
China’s market has also clearly plateaued. New car sales have fallen in three of the past four months and inventories are close to record levels. India’s sales are the only bright spot, up 7 per cent this year, but India’s market is just a tenth of total Bric volume.

The second shock is focused on China’s own domestic market. As forecast on beyondbrics in June, used car sales are starting to cannibalise new car volumes. The critical issue is that China’s used car market was very small before its stimulus programme began, with only around 1.5m sold in 2008. The lending bubble thus meant new car sales rocketed, as there were so few used cars available.

Today, of course, the market is completely different. New car sales have trebled since 2009 to reach 19.4m last year – vastly increasing the volume now available for resale. These cars also last much longer, due to the adoption of western manufacturing standards. China’s dealer association thus expects at least 10m used cars to be sold this year, confirming the paradigm shift now under way:

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

In turn, this will create the third major shock, as it means China will have vast over-capacity as its auto industry expands to produce 30m cars by 2020. Exports are therefore poised to rise, with the government forecasting 3m overseas sales in 2020. But where will all these cars be sold? There is no obvious answer, as no other market can possibly replace China and the Bric’s lost demand growth. Inevitably, this surplus capacity will end up fighting for market share in an already over-supplied global market.

These trends are unlikely to reverse. China’s new Five Year Plan confirms its move away from the Old Normal economy based on exports and vast infrastructure spending. Instead, it is transitioning to a services-led New Normal, based on the mobile internet. So its need for commodity imports will continue to weaken, while new cars will be less affordable as demand becomes based on income rather than property bubble windfalls.

‘Adapt or die’ is therefore the strategic imperative for those who once believed that new car sales in China would always rise at double-digit rates. The good news is that as one door closes, so another is opening. China now offers a major opportunity to develop a service-led business model focused on the used car market. But very difficult times lie ahead for those who continue to hope for a return to the Old Normal economy.

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