Consumers are starting to reject the use of single-use plastics, as this Financial Times letter from leading supermarket and business CEOs highlights. Business as usual is no longer an option for plastics producers, as I discussed on Monday.
Sir, The UK’s retailers make a vital contribution to the economy. With revenues of more than £380bn, the sector employs 4.6m people in the UK. Over the past decade Britain’s retailers have in the main focused on recycling in a bid to reduce the environmental impact of the plastic waste they produce. But we have to accept that this isn’t enough — by recycling plastic, we are merely recycling the problem.
Unlike materials such as aluminium and glass, plastic packaging cannot be recycled ad infinitum. Most plastic packaging items can only be recycled twice before becoming unusable. Regardless of how much is invested in Britain’s recycling infrastructure, virtually all plastic packaging will reach landfill or the bottom of the ocean sooner or later. It is therefore essential that retailers and packaging manufacturers work together to turn off the tap of throwaway packaging. Retailers should take advantage of the raft of zero-plastic packaging solutions that provide a real alternative to conventional plastic.
Campaign group A Plastic Planet believes supermarkets can drive a shift away from throwaway packaging by introducing a plastic-free aisle in their stores. We agree. A plastic-free aisle would be good for business. With at least a third of consumers saying that they base their purchasing decisions on the social and environmental impact of the products they buy, a plastic-free aisle would help supermarkets win over this growing band of informed consumers.
We call on the UK’s retailers to support this imaginative initiative, and help us to secure a better future for our children and grandchildren.
Former CEO, Asda
Sir Ian Cheshire
Lord Rose of Monewden
Former CEO, Argos; former Chairman and CEO, Marks and Spencer
Lord MacLaurin of Knebworth
Former Chairman, Tesco
Lord Stone of Blackheath
Former Managing Director, Marks and Spencer
Lord Jones of Birmingham
Former Chief Executive, British Soft Drinks Association
Lord Cameron of Dillington
Former National President, Country Land and Business Association
Baroness Scott of Needham Market
Former Board Member, Lloyds Register; Party President, Liberal Democrats
Former Co-Secretary and Legal Director, Kingfisher
Lord Foster of Bath
Associate, Global Partners Governance
Lord Hodgson of Astley Abbotts
Former Director, Marston’s
Former Attorney General
Former Director, Oxfam
Baroness Miller of Chilthorne Domer
Unicef Board Member
Lord Rees of Ludlow
Baroness Lister of Burtersett
Author and Professor
Managing Director, Weleda UK
China is now developing a used car market for the first time in its history. This means the end of global auto sales growth, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
China’s car market has been key to the recovery in global auto sales growth since 2009, as the chart shows.
Its passenger car sales in the first half of each year have risen threefold between 2007 and 2017, from 3.1m to 11.3m today, while sales in the other top six markets have only just managed to recover to 2007 levels.
But now major change is coming to China’s market from two directions.
The first sign of change is the fact that H1 sales rose just 2.7% this year. This is the lowest increase since our records began in 2005 (when sales were just 1.8m), and compares with an 11% rise last year.
Official forecasts for full-year growth have also been revised down, to between 1% and 4%, by the manufacturers’ association. A further sign of the slowdown is the rise in price discounting, with Ford China suggesting prices were down 4% on average in the first half.
The second change may be even more important from a longer-term perspective. It seems likely that China’s used car market is poised for major growth. As the second chart shows, only 10m used cars were sold last year, versus 24m new cars.
Yet used car sales are typically between 2 and 2.5 times new car sales in other large markets such as the US, where 2016 saw 39m used car sales versus 18m new car sales.
The background to this unusual situation is that China’s new car sales were relatively small until the government’s stimulus programme began in 2009. Their quality was also poor, as most cars were produced domestically and only lasted an average of three years. As a result:
The auto market only really began to take off in 2009 under the influence of the stimulus packages, when annual new car sales jumped 53% from 6.7m to 10.3m. About 200m Chinese were able to drive a car in that year, and the stimulus programme suddenly provided them with the cash to buy one
Used car sales were much slower to develop, as it took time for the introduction of western manufacturing techniques to gradually extend the average life of a car from 3 years in 2012 to 4.5 years today. But now the pace of change is rising, and it is expected to reach 10 years by 2020
The chart also shows our forecasts for the used car market out to 2020, when we expect used car sales to equal new car sales at 23.5m. This would still only represent a 1x ratio, but the forecast is in line with a new report from Guangzhou-based analysts Piston, who told WardsAuto:
“The used-car market in China is expected to have an explosion in the coming decade, because the ratio of used to new is [the opposite of that in] the US.”
One sign of the change under way was seen last month, when Guazi.com, China’s largest used car trading site, was able to raise a further $400m from investors to expand its service.
Guazi, like BMW and others, have seen that the used car market offers very favourable prospects for growth prospect — as long as attention is paid to boosting buyer confidence by providing sensible warranties and service packages.
Local governments have also played their part under pressure from central government. The state-owned China Daily reports that 135 local authorities have now removed barriers that prevented used cars from one province being sold in another. The effect of these changes is having an effect, with used car sales in January-May jumping 21% versus 2016.
Such strong growth rates, and the slowdown in new car sales, suggest China’s auto market may have reached a tipping point.
All good things come to an end eventually, and it seems prudent to assume that China will no longer be the main support for global auto sales. We expect China’s new car sales to plateau because of the combined impact of the end of stimulus (as discussed here in June), and the rise of used car sales, as these will inevitably cannibalise their volumes to some extent.
Clearly this is not good news for those western manufacturers that have made China the focus of their growth plans in recent years. And there may be worse news in store, given the government’s determination to combat urban pollution by promoting sales of electric vehicles and car-sharing.
Yet it will be good news for those prepared to develop new, more service-related business models. Used-car sales themselves can be highly profitable, while servicing and spare parts supply are likely to become equally attractive opportunities.
Paul Hodges publishes The pH Report.
China’s Top 3 manufacturers – Huawei, OPPO and Vivo – captured top position in global smartphone sales for the first time in Q1. As the chart shows:
□ They took 22.9% of the market compared to 22.7% for Samsung and 14.4% for Apple
□ In terms of individual smartphone sales, OPPO’s R9s smartphone reached the No. 3 position worldwide
□ It was still behind Apple’s iPhone 7 and iPhone 7Plus, but ahead of Samsung’s aging Galaxy J3 and J5 models
As Strategy Analytics noted:
“OPPO is largely unknown in the Western world, but its brand is wildly popular in China and growing rapidly across India. The R9s is OPPO’s flagship 4G device with key features such as dual-SIM connectivity and fingerprint security.”
This confirms the trend that developed during 2016 as I noted when reviewing 2016 data, ‘Smartphone profits under threat as market goes ex-growth‘:
“The issue is that 3.1bn people now own smartphones, and the other 4.2bn can’t afford them. So inevitably, the market is going to focus more and more on price. Of course, millions of people will still want to own an iPhone or Galaxy. But price will become the deciding feature for many people.”
The impact can be seen throughout the smartphone eco-system. Consolidation is the normal response when market growth begins to slow. As the second chart confirms, Q1 sales at 353m were only up 2% versus Q1 2015, when the global market began to plateau. The low-cost Chinese players are now gaining share in the mass-market versus Apple and Samsung as premium pricing disappears, and the micro-vendors are also being squeeezed:
□ This price pressure led to Apple losing out in China to cheaper models with similar features
□ The “Top 100+” micro-vendors were also squeezed, and were collectively down 8% versus Q1 2016
□ The success of low-cost larger producers meant the “Top 30+” gained 8% versus Q1 2016
Samsung are most at risk at the moment, as they recover from the Galaxy Note 7 problems. Their sales fell around 60% in China – the world’s largest market. They are now launching the new Galaxy S8 model to rebuild their position, but will also face strong competition in H2 with Apple’s 10th anniversary iPhone.
The same process of consolidation has, of course, already played out in the smartphone software market, where Google’s Android system is now the dominant player. It has 86% of the market, with only Apple’s iOS system (14%) still competing against it. Apple therefore has to get everything right with the 10th anniversary iPhone – if it fails to excite, then Apple’s entire business model of combining hardware with software will be at risk.
Greed and fear are the primary emotions driving China’s housing and auto markets today, as China’s lending bubble hits new heights. For ordinary citizens, greed is the key driver:
Average home prices in Beijing rose an eye-popping 63% between October 2015 – February 2017
In Shanghai, one enterprising estate agent (realtor) has married 4 of his clients to enable them to buy a home
Mr Wang’s story highlights the bubble mentality that has taken over the market. As the Daily Telegraph reports, 30-year old Mr Wang:
“Married, and then quickly divorced 4 women to allow them to circumvent strict property laws which seek to cool prices in China’s booming cities, and pocketed more than £8000 ($10k) from each transaction. Once the paperwork is put through, Wang applies for a divorce and puts himself on the market again”.
This is just the latest phase of a market craze, as I noted in November, when one Shenzhen resident told the South China Morning Post:
“The only thing I know is that buying property will not turn out to be a loss. From several thousand yuan a square metre to more than 100,000 yuan. Did it ever fall? Nope.” He and his wife got divorced in February, in order to buy a 4th apartment in Shanghai for 3.6m yuan (US$530k) on the basis that “ If we don’t buy this apartment, we’ll miss the chance to get rich.”
A collective delusion has swept China’s Tier 1 cities, just as happened in the USA during the sub-prime bubble. Amazingly, China’s property bubble is even larger than sub-prime. Unremarkable pieces of land in Shanghai are now being sold at $2000/sq foot ($21500/sq metre), nearly 3 times the average land price in Manhattan, New York.
It is understandable in some ways, as Chinese buyers have never known a downturn, as I noted in September:
“It is also easy to forget that housing was all state-owned until 1998, and still is in most rural areas. Urban housing was built and allocated by the state – and there wasn’t even a word for “mortgage” in the Chinese language. Not only have home-buyers never lived through a major house price collapse, they have also had few other places to invest their money”.
The scale is also much larger, as UBS have reported:
“Chinese banks’ outstanding loans extended to the property industry were between Rmb 54tn – Rmb 72 tn in 2016 ($7.8tn – $10.4tn).”
The chart above confirms this analysis. In reality, the key driver for the bubble has been the growth in lending. As with the US subprime bubble, this has not only impacted housing markets, but also auto sales:
Q1 lending (Total Social Financing) averaged Rmb 2.4tn/month, 2.2x the Rmb 700bn/month level in Q1 2008
Q1 auto sales averaged 1.9 million, 2.06x the 733k/month average in Q1 2008
China’s GDP was only $11.2tn last year, meaning that its property sector loans are more than 2/3rds of GDP.
The problem is that everyone loves a bubble while it lasts. And so, as in the US during subprime, most analysts are keen to argue that “everything is fine, nothing to worry about here”.
In the US, we were told at the peak of the bubble in 2005 by then Federal Reserve Chairman, Alan Greenspan, that house prices would never fall on a national basis
Today, similar wishful thinking dominates, based on the myth that China has suddenly developed a vast middle class, with Western levels of incomes
The problem, of course, as the second chart shows, is that this is also not true. Annual disposable income for city-dwellers averaged just $5061 last year, whilst in rural areas it averaged only $1861. You really don’t buy many homes or cars with that level of income, unless a massive lending bubble is underway.
And this is why fear is the right emotion for everyone outside China. Its lending bubble has driven the “recovery” in global growth since 2009 – pushing up values of everything from homes to oil prices. So anyone who remembers the end of the US subprime bubble should be very scared about what could happen when – not if – China’s bubble bursts.
We can all hope that President Xi’s new policies will enable a “soft landing” to occur, and gently unwind the stimulus policies put in place by Populist Premier Li and his predecessor Premier Wen? But hope is not a strategy. And as the Guardian reported last month:
“Goldman Sachs is said to estimate the chance of a financial crisis in China this year at 25%, and in 2018 at 50%.”
Brexit negotiations are likely to prove a very uncomfortable ride for UK consumers as Russell Napier of Eric, the online research platform, warned last week:
□ ”Public sector debt remains at near-historic highs (in peace time!) and for the first time this public sector debt comes with a private sector bubble
□ Credit card debt is rising at its fastest rate in a decade — 9.3% in the year to February
□ Unsecured debt as a whole is rising at more than 10% and some 6,300 new cars are bought on credit in the UK every day”
Companies and investors already face growing uncertainty as March 2019 approaches, as discussed on Monday. UK consumers now face similar challenges as their spending power is further squeezed by the pound’s fall in value since June, as the chart confirms, based on official data:
UK earnings for men and women have been falling in real terms since the financial crisis began in 2008
Male earnings are down 5% in £2016, and female earnings down 2%
Since June, unsurprisingly, cash-strapped families have had to raid their savings to fund consumption
New data shows the UK savings ratio hit an all-time low of just 5.2% last year – and was only 3.3% in Q4
One key issue is that monetary policy has reached its sell-by date, with Retail Price Inflation hitting 3.2% in February as a result of the pound’s fall. Interest rates may well have to rise to defend the currency and attract foreign buyers for government bonds. Foreigners currently fund more than a quarter of the government’s £2tn ($2.5tn) borrowing, and cannot easily be replaced.
Unfortunately, these are not the only risks facing the UK consumer. As I feared in June:
“ Many banks and financial institutions are already planning to move out of the UK to other locations within the EU, so they can continue to operate inside the Single Market
There is no reason for those which are foreign-owned to stay in the country, now the UK is leaving the EU
This will also undermine the London housing market by removing the support provided by these high-earners
In addition, thousands of Asians, Arabs, Russians and others will now start selling the homes they bought when the UK was seen as a “safe haven”
Lloyds, the global insurance insurance market, has just announced plans to move an initial 100 out of 600 jobs to Brussels, so that it can continue to serve EU clients. Frankfurt, Paris, Amsterdam, Dublin and Copenhagen are also lining up to offer attractive deals to companies wishing to maintain their EU passports to trade. And last month saw an ominous warning from JP Morgan Chase CEO, Jamie Dimon:
“The clustering of financial services in London is hugely efficient for all of Europe. Now you’re going to have a de-clustering, which creates huge duplicative cost which is expensive to clients. Nevertheless, we have no choice.”
Dimon’s warning was reinforced on Tuesday by the leader of the powerful European People’s Party in the European Parliament, who told reporters 100k financial services jobs would likely relocate from London due to Brexit:
“EU citizens decide on their own money. When the UK is leaving the EU it is not thinkable that at the end the whole euro business is managed in London. This is an external place, this is not an EU place any more. The euro business should be managed on EU soil.”
Until now, many consumers have been cushioned from the fall in real incomes by the housing bubble. But as I discussed in December, the end of such bubbles is normally quite sudden, and sharp:
Worryingly, UK house prices fell in March for the first time in 2 years
The Bank of England also reported that mortgage approvals are falling
And normally, lower mortgage volume leads to lower house prices
Certainly it would be no surprise if prices did now start their long-overdue collapse, as highly-paid financial professionals start to leave the UK. One key indicator – the vastly over-priced 9 Elms development – now has an astonishing 1100 apartments for sale. And if the housing market does collapse, then recession is inevitable.
The key problem is that consumers do not have many options when the economy moves into a downturn. New sources of income are hard to find if mortgage costs start to rise. All they can do is to cut back on spending, and boost their savings – to help them cope with any future “rainy days”. This in turn creates a vicious circle as consumption – over 60% of the economy – starts to fall.
There are therefore no easy answers when trying to plan ahead for likely storms. But being prepared for a downturn is better than suddenly finding oneself in the middle of one.
OPEC has a long wait ahead, if it hopes that US drivers will ever go back to SuperCycle levels of driving and gasoline consumption growth. That’s the clear message from new data from the US Dept of Transport showing vehicle miles traveled last year. The chart shows:
□ Average number of miles driven per adult American since 1970 (using over-16 as the normal legal driving age)
□ Average US gasoline price in $/gallon, adjusted for inflation
□ The annual mileage driven rose every year between 1970 – 2004, unless prices increased due to oil price moves
□ Annual mileage is now 6% less than in 2004, even though prices were actually cheaper in 2016 than in 2004
At the same time, US cars have also become more fuel efficient thanks to EPA regulations. Miles/gallon has increased by 28% since 2004 in terms of each model year, even though there has recently been a boom in larger, less fuel-efficient, Sports Utility Vehicle sales. Thus although US gasoline demand hit a new record volume of 9.2mb/day in 2016, the combination of increasing fuel efficiency as older cars are scrapped, plus the continuing decline in miles/driven per adult, suggestes that the best days of the market are behind it.
In addition, of course, major changes are now underway in the US market for mobility. Whilst some people obviously like cars and want to own them, most purchases are because people need to be mobile. In the past, cars were often the only option as US public transport options were relatively limited, particularly for Boomers who had chosen to escape the inner cities and move out to the suburbs. They often needed more than one car to transport the family.
Today, however, the Boomers are driving less as they move into retirement, and are moving back to the cities, whilst the Millennials have much less interest in moving to the suburbs. Both Boomers and Millennials also have other options, such as social media, for meeting up with friends. As a PRIG study has noted, the number of households:
□ ”Without cars increased in 84 out of the 100 largest urbanized areas from 2006 to 2011
□ With two cars or more cars decreased in 86 out of the 100 of these areas during that period”
So market conditions are far more favourable for new business models. Nobody yet knows if car-sharing, or Uber and Lyft type services, or autonomous cars, will prove successful. Nor do we know if the electric cars being developed by GM, Ford, Chevrolet, Tesla and others will prove successful. But what we do know is that gasoline consumption has almost certainly peaked in the US. As the President of GM, Dan Ammam, suggested last year:
“We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50 years”.
It is also hard to disregard the argument of Ford’s chairman, Bill Ford, who argued in his 2011 TED talk that current driving habits would inevitably lead to gridlock, as:
“The average American spends about a week a year stuck in traffic jams, and that’s a huge waste of time and resources….
OPEC might have felt able to ignore Ford’s commentary back in 2011. But today, the growth of car-sharing, Uber and Lyft, electric cars and autonomous vehicles suggests it would be unwise for it to ignore the major changes underway in the world’s largest single market for gasoline.