Despite encouraging signs in recent months, China's automotive industry remains set for its third consecutive year of decline in 2020 as the boost from pent-up demand and generous incentives will likely lose steam in the second half, industry observers warned.
The coronavirus pandemic prompted a 42.4% year-over-year sales slump from January through March as dealerships were shuttered and citizens remained under lockdown. Still, demand has returned since with sales rising 4.4% year over year in April and 14.5% in May, according to data from the China Association of Automobile Manufacturers, or CAAM.
The rebound was mainly due to a combination of pent-up demand, subsidies by local governments, heavy discounting, especially during the Labor Day holidays in May, and a rise in first-time car buyers looking to avoid public transport due to fears around the spread of the virus.
Demand for SUVs drove strong May sales, prompting the industry body to improve its 2020 forecast to a decline of between 10% and 20% from a drop of 15% to 25%, saying that the market is showing signs of recovery.
However, as the economic impact of the COVID-19 outbreak dampens consumer sentiment, and subsidies and discounts begin to dry up in the second half of the year, experts believe demand will soften again.
"I would prefer to use the word 'normalization,' things getting back to normal. It's not exactly a recovery," Benjamin Lo, head of China auto research at Nomura, said during a June 4 webinar.
The decline could begin as early as June, which is traditionally a weak sales month. However, it saw high demand a year ago when carmakers cleared inventories ahead of the introduction of new emission standards.
Summer has not typically been a high season for vehicle sales, so the market will depend on launches later in the year to help drive revenue, said Tu Le, managing director at Sino Auto Insights. But those plans could be thwarted by the uncertainty from the COVID-19 situation, Le said.
The virus discount
Local governments in recent months have led car purchase incentives. Over 20 regions have rolled out stimulus packages including cash incentives for trade-ins, car purchase subsidies and relaxations of license plate controls for both internal combustion engine, or ICE, and electric vehicles.
For instance, auto-manufacturing hub Guangzhou offered between 1,000 yuan and 8,000 yuan in cash incentives for new car buyers. The southern Chinese city issued 17,089 license plates in April, up 70% from March.
The incentives, however, are capped and many will expire before the end of the year, hence lessening their long-term impact. Most subsidies are limited to larger cities which will help brands with stronger recognition, said Nomura's Lo. Analysts also noted that the subsidies have triggered "aggressive" auto financing, which tends to favor larger automakers.
A survey carried out by Jefferies showed that zero-down payment auto financing with longer terms of up to 60 months was offered in Tier 1 cities during the period. Car dealerships followed suit with cashback, petrol vouchers and free after-service to sweeten the deal, Jefferies analysts said in a May 4 research note.
As dealerships slash prices of major car brands to drive sales, lower-end Chinese models will become less competitive among lower-middle-class car buyers, Morningstar analyst Ivan Su said.
Among Chinese brands, Geely Automobile Holdings Ltd. is among the companies to have responded with heavy price cuts, which were managed by reducing the specifications and features of its vehicles. While Geely's sales rose 24.7% year over year in May, the market share of the local brands overall dropped to 34.8% in the January to May period from 39.1% in the year-ago period.
The Vehicle Inventory Alert Index, which measures inventory risk, in May was the highest for Chinese car brands, at 60.7%, followed by domestic-international joint venture brands at 53.4%, and imported and premium brands at 52.3%.
Given the benefits enjoyed by cheaper models previously under a national policy to encourage car ownership in rural cities, lower-end manufacturers should not expect any additional boost in 2020, said Stephen Dyer, managing director of consultancy AlixPartners.
Aspirational brands in demand
Joint venture and luxury brands, especially German and Japanese ones, have grown their market share in 2020 and are expected to further expand their dominance under policies that favor middle-class buyers, analysts said.
Sales of Volkswagen AG, which sells upper-middle-range brands, grew 5.7% year over year in China in May even as its global sales fell 34%, while Japan's Toyota Motor Corp. reported 20.1% sales growth in May.
Luxury vehicle sales grew 26.6% in May and their market share increased to 14% compared to 12.9% in the first quarter of the year, according to China Passenger Car Association data. Discounts across the segment will help the luxury carmakers to continue to gain market share in 2020, said Liu Kun, senior consultant at Ries.
Premium brands like Bayerische Motoren Werke AG, AUDI AG, Daimler AG-owned Mercedes-Benz and Tata Motors Ltd.-owned Jaguar Land Rover Ltd. continued to be in high demand for Tier 1 car buyers, benefiting from the easing of car registration plates limits and dealers offering discounts and freebies worth up to 140,000 yuan during the Labor Day promotion, according to the Jefferies survey.
The same can be said for Tesla Inc. as demand for its China-made models surged in May, in contrast to an overall decline of 23.5% in new energy vehicle sales during the month. Although the 20,250 yuan discount from the subsidy contributed to the sales boom, industry observers believe car buyers were more motivated by the experience of owning a Tesla.
"Premium consumers are a little less sensitive to general economic conditions and there is a long-term trend of customers replacing their old vehicles by upgrading to more premium vehicles," said Dyer.