2018: A Transition Year for China Autos?

gac-ga3-162018 may be shaping up to be a transition year for China automobiles. It may be the year that marks the end of the industry’s nearly 20-year growth phase, and the beginning of a mature phase where vehicle sales grow in line with overall economic factors. According to the China Association of Automobile Manufacturers (CAAM), vehicle sales fell by 11.6 percent to 2.4 million units in September, the third straight monthly decline this year. Even SUVs, the best performing category in recent years, saw unit sales drop by 10.1 percent in the month.

For the first nine months of the year, total vehicle sales eked out a modest 1.5 percent gain to 20.5 million units. Passenger car sales grew by 0.6 percent to 17.3 million units, while sales of commercial vehicles grew by 6.3 percent to 3.2 million units. Within the passenger car segment, sedans accounted for 49 percent of sales, growing by 1.3 percent to 8.4 million units, and SUVs accounted for 42 percent, growing by 3.9 percent to 7.2 million units during the period. Fueled by 13.3 percent growth in light truck sales, trucks were the strongest performing category overall, increasing by 7.6 percent to 2.9 million units

Other than trucks, the only other bright spot was new energy vehicle (NEV) sales, which increased by 81.1 percent to 721,000 units. With respect to NEVs, government policies are affecting not only the growth but also the structure of this industry sector.

Under the old system of subsidies, plug-in hybrid electric vehicles (PHEVs), unlike “all-electric vehicles” (EVs), were not eligible for subsidies, reducing their appeal to Chinese consumers. Under the country’s new NEV policies that went into effect in 2017, however, consumer subsidies are being replaced by fuel consumption targets for manufacturers. Because they lower a vehicle fleet’s average fuel consumption and help the manufacturer to meet the government’s targets, PHEVs are now in favor. During the first nine months, EVs grew by 66.2 percent to 541,000 units, but PHEVs grew even faster by 146.9 percent to 181,000 units.

Despite the strong performance of light trucks and NEVs, the consecutive monthly declines in total vehicle sales during the third quarter have caused many industry observers to re-evaluate their projections for industry growth. Some worry that the world’s largest auto market could contract in 2018 for the first time since the 1990s. Xu Haidong, CAAM’s Assistant Secretary-General, believes that the market will avoid a sales decline, but does not believe that it will meet CAAM’s earlier prediction of 3.0 percent growth.

A slowing economy, Beijing’s deleveraging initiative, a collapse in online lending, higher gasoline prices and a tough crackdown on pollution have all been cited as reasons for a softer automobile market in 2018. All of those factors have certainly had an impact on sales, but the sentiment is growing that the China auto market may already be reaching a saturation point.

With 276.1 million trucks, buses and passenger cars in its vehicle population, providing 857 vehicles for every 1,000 people, the United States is arguably the world’s most mature auto market. Even though China leads the world in terms of annual auto sales, its population of 217.0 million vehicles provides just under 155 vehicles for every 1,000 Chinese. Due to the large disparity in vehicles per capita between the two countries, the conventional wisdom has been that China’s auto industry has substantial room to grow before it approaches the number of vehicles per capita in the United States. However, this argument does not take into account the fact that China, with its large population and a high percentage of uninhabited landmass, has a much higher level of urban density than the United States.

A recent report by Bernstein, a well-regarded research firm that closely follows China’s auto industry, further develops this argument. According to Bernstein, the Chinese auto market is now nearing maturity as the penetration of automobiles in the country approaches 160 cars per 1,000 people. After analyzing 100 years of global auto sales data, Bernstein found that in market after market, an inflection point is reached when car ownership penetration in a country reaches 160 cars per 1,000 people. When this penetration level has been reached, secular high growth in auto sales has transitioned to slower cyclical growth. Such a transition occurred in the United States in 1925, the United Kingdom in 1965, Japan in 1970, and Korea and Taiwan in the mid-1990s. China will reach 160 cars per 1,000 people in 2019 or 2020.

As further evidence that a fundamental shift in the outlook for China auto sales is occurring, Bernstein notes that most of China’s Tier 1, Tier 2, and Tier 3 cities are now “full of cars.” In 2017, Beijing had car ownership penetration of 260 cars per 1,000 people, while the top 10 cities averaged 251 cars per 1,000 people. At these levels, many local governments have deemed it necessary to restrict car sales in their cities, with Beijing taking it a step further by restricting the size of the total fleet in the country’s capital city. Finally, Bernstein notes that growth in licensed drivers in China has slowed in recent years, and this is a further sign that China’s auto industry is reaching maturity.

Only time will tell whether Bernstein is correct, or whether weak auto sales in 2018 are merely the result of a combination of adverse economic factors. In any case, the industry’s performance in 2018 is giving all auto assemblers and industry observers pause for reflection.

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