China, the world’s largest and fastest growing car market, is showing signs of losing steam; it recorded negative growth for the first time in 20 years.
For the sixth straight month in a row, China car sales fell. The rate of decline was 13% in December versus the year earlier, bringing the full year 2018 sales to 28.1 million. This was a decline of 2.8% from 2017; at the outset of 2018, the China automotive market was projected to grow by 3%. While the first half of the year started off steadily, the story began to unravel soon after. Signs of a moderating economy are apparent, with fault lines appearing from a combined impact of government credit-tightening measures, and the anxiety of a prolonged trade war with the US.
What Ails China Automotive Sales?
A number of concurrent and compounding factors pulled automotive sales down in 2018. Significant among them are:
Vehicle Purchase Tax Changes: In 2015, the government introduced policy incentives to stimulate car purchases. From October 2015 to Dec 2016, vehicle purchase tax for low-emission cars (≤1.6L engines) was lowered from 10% to 5%, stimulating an aggressive YoY growth of 15% in passenger car sales during the period. In 2017, vehicle purchase tax was raised to 7.5%, resulting in car sales growth moderating to 1.4%. In the beginning of 2018, addressing growing environmental concerns, the purchase tax was moved back to 10%, slowing sales noticeably. Towards the end of the year, most car buyers considered postponing purchases, in anticipation of tax cuts being reinstated in early 2019, to jump-start the industry.
US-China Trade Tension: In July, import duty on U.S. vehicles was raised by China to 40%, a result of the two countries raising tariffs on $50 billion worth of trade goods from each other. The initial round of tariffs has dramatically impacted the automobile industry, with uncertainty to China’s manufacturers and traders on their export businesses. Ford was the worst hit among global car makers in China last year, with its sales shrinking 37% percent. Tesla dropped prices of its Model X and Model S models in China between 12 and 26%, absorbing a significant part of the tariff, to ensure their cars remain competitive, with sales of locally produced new-energy vehicles (NEVs) rising fast.
Currently, China has eased-back, announcing a suspension of additional tariffs on US vehicles and auto parts for three months, starting January 1, 2019. However, should tensions flare-up again, China can be expected to hit back at US automotive manufacturers, with another round of tariffs.
Increasing Household Debt Ratio: Based on research by Renmin University, the average household leverage ratio in China (household debt/household income) reached 111% at the end of 2017, higher than the U.S., which was at 108%. The ratio is significantly higher for tier one and tier two cities, with relatively higher property prices, constraining discretionary spending, especially for car purchasing.
Moderating Economy: The Chinese economy is being estimated to have grown around 6.6% in 2018 – the weakest since 1990. Expectations are that a target between 6 to 6.5% is being planned for 2019. The slowdown may have a number of underlying reasons including the Yuan weakening, Chinese stocks losing value, consumers agonizing over China’s deepening trade dispute with the U.S, tightening of consumer financing and a flattening demand for smartphones.
With decreased household incomes, especially in tier three and four towns, consumers are holding back non-essential purchasing, influenced by a conservative outlook. These consumers have been a primary target for budget cars and have been the contributors for market growth in recent years.
2019 Outlook
China Association of Automobile Manufacturers (CAAM) expects weakness to persist and has forecast flat sales of 28.1 million vehicles for 2019, while other government and industry bodies see 0% to 2% growth. China is already in dialogue aiming to resolve trade tensions with the US, confirming suspending reciprocal tariff increase temporarily, on automobiles and parts imported from America.
In terms of stimulus interventions, tax breaks have been the most popular mechanism used in the past, especially for new energy vehicles (NEV), which also contribute to a greener economy. Encouragingly, NEV sales jumped 61.7 percent in 2018, to 1.3 million units for the year.
Chinese authorities have also been trying to rein-in the country’s rising debt, with China’s state-owned banks told in April to stop lending to local governments. As the economy shows sign of softening, China appears to be using investments to boost the economy again. The National Development and Reform Commission, a top Chinese economic regulator, has already announced promoting infrastructure investments earlier last year, with specific reference to bullet trains and public transportation.
China’s central bank has also stated it will reduce the ratio of cash to loans that domestic lenders need to hold on their balance sheets, a move that is expected to add $220 billion to the nation’s financial system, as officials attempt to re-ignite growth.
NEVs to the Rescue?
A positive signal for the automobile market in China is sales of NEVs. While traditional passenger cars are seeing a continuous decline, sales of NEVs in 2018 reached close to 1.3 million from January to November 2018, up nearly 62% compared to last year. NEVs are expected to emerge as the new upgrade catalyst for the market. CAAM sees NEV sales hitting 1.6 million this year. Electric-car sales, accounting for 4% of 2018 total, are expected to be on track to hit the government’s 2025 projection of 20%, especially with regulations previously announced, mandating all automakers to start producing EVs in 2019. Tesla has already broken ground for a new factory in Shanghai, aiming to start production by the end of the year, while GM, Volkswagen, and others are readying a flurry of EV launches.
Growth of EVs in China is attributed to supportive government policy, including public procurement programs, financial incentives, subsidies to EVs’ purchase prices, tighter fuel-economy standards, stringent emission regulations, low/zero emission vehicle mandates and a variety of local measures, i.e. restrictions on vehicle usage based on emission performance.
However, despite these governmental interventions and growing absolute numbers, EV penetration remains low. Considerable work still needs to be done, i.e. technological upgrades for battery range, further investments in accessible charging infrastructure and vehicle development for products that Chinese customers really want, before EV’s can compensate for the shortfalls in conventional fuel vehicles.
Conclusion
The Chinese auto market is possibly nearing maturity, with penetration of automobiles in the country’s major tier one, two and three cities reaching a point of inflection. The year’s weaker auto sales may also just be a result of a combination of adverse economic factors. In any case, China’s industry’s performance in 2018 is giving global automakers and industry observers pause for reflection, and concern.
Analyst Contacts:
Vinay Piparsania
vinay@counterpointresearch.com
@VPiparsania
James Yan
james@counterpointresearch.com
@james_a3
Rick Cui
rick@counterpointresearch.com
Flora Tang
flora@counterpointresearch.com
