China Auto Update: 2014 First Half

fordescort Despite a slowing economy, China’s auto industry sales were strong during the first six months of the year. Passenger car sales registered a double-digit increase of 11 percent to 9.6 million units during the period as consumers continued to flock to dealer showrooms. The slowing economy did have an impact on the commercial vehicle market, though. Truck sales slipped by four percent to 1.8 million units, while bus sales increased by a modest four percent to approximately 300,000 units. Overall, total vehicle sales increased by eight percent to 11.7 million units through the end of June.

The divergence in sales between passenger cars and commercial vehicles is further evidence that China’s economy is transitioning from one that is led by government spending, construction and heavy industry, to an economy that is increasingly tied to consumption. The purchasing power of Chinese consumers is illustrated by the fact that sales of premium cars are leading the way in China. Continuing the pattern established in 2013, MPVs and SUVs outperformed the overall market by a significant margin. MPV sales during the first six months of 2014 increased by 55 percent to almost 900,000 units, while sales of SUVs increased by 37 percent to 1.8 million units.

According to Max Warburton, Senior Analyst at Bernstein Research, the purchasing power of Chinese consumers is being further expanded by a sharp increase in retail auto financing. In a recent research report, Warburton said: “The Chinese car market is changing fast. The mythical customer with suitcases of cash is exactly that now: a myth. Chinese consumers are increasingly following Western behavior and using leverage to buy cars.” Western loan features such as low down payments and zero-interest financing are now commonplace and are making even expensive cars more affordable for a wider universe of buyers.

As evidence, Warburton says that retail financing penetration in China stood at 18 percent for the whole year of 2013, but ended the year at 22 percent. Through the first four months of 2014, retail financing penetration averaged 21 percent, reaching a peak of 24 percent in April. Financing penetration rates for the German premium brands are even higher and are approaching 50 percent. Expanded retail financing is one of the key reasons why demand for foreign branded cars, particularly the luxury models, has been so strong.

While most foreign carmakers are doing well these days for financing and other reasons, the Ford Motor Company (NYSE:F) stands out and has been one of the strongest performers so far this year. According to a Ford press release, Ford sales in China passed the half-million mark in the first half of the year, increasing by 35 percent to almost 550,000 vehicles.

Ford manufactures and sells vehicles in China through two companies: Changan Ford (“CAF”), a joint venture that makes and sells passenger cars, and Jiangling Motors Corporation (“JMC”), its commercial vehicle investment. Both companies performed well in the first six months. CAF sales were up 39 percent to almost 400,000 units, while JMC sales increased by 21 percent to 133,000 units.

The Focus is Ford’s best-selling model in China with sales of just over 200,000 cars through the end of June. The Mondeo is coming on strong, though, with sales increasing by 124 percent to almost 60 thousand during the same period. Ford is also participating in China’s SUV boom. Sales for Ford’s class-leading Ford Kuga and Ford EcoSport SUVs were up by big margins in the first half. Ford Kuga sales rose 78 percent in the first six months with over 66,000 vehicles sold, and the sales of EcoSport sales more than doubled to over 33,000 vehicles.

Spurred on by its recent success, Ford is very bullish on China and continues to invest heavily in the country. As part of its accelerated growth plan for China, Ford opened a $350 million transmission plant in Chongqing last month, its first transmission plant in the Asia Pacific region. In terms of new models, Ford will bring its midsized Everest concept, which was shown at the recent Beijing auto show, to China where it will be produced by JMC. To increase its penetration of the China market, Ford launched 88 new dealerships across China this year, bringing its total dealer count in the country to 750.

When Ford Chief Executive Alan Mulally came to Ford in 2006, he pushed the company, which long relied on demand from the U.S. and Europe, to expand in Asia. As a Boeing executive who worked on the opening of China’s market to Western aircraft and helped set up the country’s air-traffic control system, Mulally well understands the importance of the China market. Perhaps the biggest legacy he will leave behind as he prepares to step down as CEO will be Ford’s rapidly growing business in China.

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