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.
Clouds are gathering over the auto industry, as the impact of the post-2008 stimulus programmes fades into history.
It is hard to believe that back in 2013, only 3 years ago, analysts were confidently predicting that Russia would have become the world’s 5th largest market by 2020. And they were similarly forecasting great things for Brazil, which had just become the world’s 4th largest market. But as the chart shows, since then:
- Russia’s sales have fallen 48% versus 2013, to total just 319k in Q1
- Brazil’s sales have fallen 44% over the same period, to total 465k in Q1
- Both markets are now smaller than India, although its sales were only up 4% versus 2013 at 700k in Q1
This highlights the slowdown in the former high-flying BRIC countries (Brazil, Russia, India, China), which had been expected to support global economic growth for decades to come. Consensus thinking had assumed that emerging markets would account for 2/3rds of global auto sales by 2020, compared to less than 1/3rd in 2000.
The problem was the general assumption that (a) growth was inevitable as the BRICs were all becoming middle class by Western standards, and (b) auto penetration would inevitably rise as this “rising middle class” would all want to buy new cars, as Reuters reported in 2013:
“The market will grow as a rising middle class becomes first time car owners or upgrades aging models. There are only 290 cars per 1,000 Russians versus 560 in Western Europe and many of those vehicles are old, while a decade of strong growth driven by Russia’s mineral wealth is slowly empowering a greater chunk of its population.”
Today, of course, it is becoming clear that the outlook is much more complex. As we note in the new Study, ‘Demand – the New Direction for Profit’, GDP/capita tells a very different story about potential growth levels for the future:
- Western developed countries mostly have GDP/capita in the range of $40k – $60k
- Brazil’s GDP/capita is just $8.8k, and Russia $8.5k
- The other BRICs are even lower, with China at $8.3k and India only $1.7k
For the moment, China’s sales are still motoring along, but the pace of growth has slowed. Volume is up 25% versus 2013, but was up just 6% in Q1 versus 2015. And the nature of the market is changing rapidly:
- Post-2008 sales growth was focused on new car sales, which were affordable due to the property bubble
- Current sales are being boosted by a 50% tax cut on sales of smaller cars, with engines less than 1.6 litre
- And used car sales are being boosted by new State Council support to promote the sector
- As I noted last year, it is currently just half the size of the new car market, but is now poised for rapid growth
The issue was that China had relatively few cars on the road in 2008, and so the stimulus programme artificially boosted new car sales. But now, all those new cars are entering the used car market, and will inevitably cannibalise future new car sales volumes.
Auto manufacturers are therefore learning their lesson the hard way. Having rushed to build new capacity, they are now either closing it – as in Russia – or repositioning it to focus on export markets as in Brazil, China and India:
- Brazil’s exports were up 24% in Q1, China is targeting 3 million auto exports by 2020
- Ford in India is already exporting nearly half of its new EcoSport production
In turn, this is exporting the BRICs problems into other markets. Volvo began exporting from China last year, and GM is starting to export this year, with more manufacturers planning to follow. Clearly, difficult times lie ahead for the industry and its suppliers, as the over-supply created during the stimulus years now battles to find a home.
Where would the global auto industry be without the Chinese market? Without China, sales in the Top 6 markets stalled last year, and were down 100k.
And what will happen now China’s economy is slowing, and it is also starting to develop a large used car market for the first time? Buyers will then have a choice between expensive new and cheaper used cars? That’s what we will discover in 2016, particularly once the subsidies for small car sales come to an end.
The chart above shows how sales have changed in the Top 7 markets which account for around 85% of global sales:
- China is the stand-out winner, with sales having trebled from 6.3m in 2007 to 20.5m in 2015
- India has also done well with sales nearly doubling from 1.4m to 2.7m – but, of course, is tiny compared to China
- The US is also up versus 2007, but only by 7% – from 16.1m to 17.3m
- Brazil and Russia boomed and then collapsed again: 2015 sales equalled 2007 at 2.5m and 1.6m respectively
- Europe is down from 14.4m to 13.7m – it is hard to believe it was the leading market in 2009, when others slowed
- Japan is down from 4.4m to 4.2m, despite all the promises of new growth with Abenomics
- Overall, sales in the Top 7 grew from 46.7m to 62.7m: but without China were only up 3% from 40.4m to 42.1m
Autos are the largest single market for chemical producers, with each new car containing around $3500 of product according to American Chemistry Council data. And the writing has been on the wall as far as sales increases outside China for some time. 2014 was a similar story of over-dependence on China. The only difference is that then, the industry still wanted to believe that China would continue to grow at double digits for decades ahead.
Now that myth has been destroyed, along with the myth that oil would always be at $100/bbl. And Q1 is proving to be a very difficult time for many companies and investors as a result.
Of course, times like this are when the really good companies begin to leave the others behind. And that is what I suspect will happen during 2016. It is no accident that the Chinese word for Crisis contains the characters for Danger and Opportunity.
The Winners in the industry will already be making plans to ensure their survival – whatever 2016 may bring. And they will also be planning to take advantage of the Opportunities that are now available, as we describe in our new 5 Critical Questions Study. This will be published very soon, and I would be delighted if you wanted to subscribe.
Its not a good time to be selling new cars in China. As the chart shows:
- Sales fell 2% in Q2 (red line) versus 2014 (green), with June down 3.4%
- This is the first time sales have fallen in a quarter since Q1 2011 (pink)
- China’s auto dealer association said customer visits to dealers “dropped sharply in H1″
- Inventories continue to grow and are at 50 days of sales, even though operating rates are below 70%
- Inventories for imported cars are at 143 days, compared to normal levels around 30 days
Contrary to many media reports, this is nothing to do with the stock market crash – which only began in mid-June. The sales downturn has been going on for months, as part of China’s switch to its New Normal economic policy direction. Thus BMW’s Chinese partner, Brilliance, yesterday forecast a 40% drop in H1 profit.
As always, slowing sales have led to price cuts. These began over the peak holiday season, according to the official CCTV station. Analysts JATO Dynamics report average prices are now 40% below official selling prices at Rmb170k ($27k). Even German brands are offering 15% discounts, whilst GM has cut prices by up to 20% to maintain volume.
Auto market developments highlight a wider trend in the economy. This will not be reflected later this week when China reports its official GDP level for Q2. But as the former head of the UK’s secret service, MI6, told the Euromoney conference last month, China’s real level of GDP growth today is probably only 3% – and falling. As Premier Li said long ago, the official number is “man-made and therefore unreliable“:
- How could China possibly collect all the data and process it in just 2 weeks from the end of the quarter?
- It takes developed countries such as the US at least 4 weeks to publish a first estimate
- Even more revealing is that China’s data is never revised – yet other countries take years to finalise the figure
Common sense suggests that the bursting of the property and stock market bubbles is bound to hit markets such as new cars and luxury items, that have depended on a wealth effect for their sales. Instead the government is focused on promoting the services sector via its mobile internet strategy.
As I discussed recently in the Financial Times, this change of direction is another reason why the new car market is struggling. For the first time in China’s history, buyers have an option to buy a cheaper used car. And those manufacturers and dealers who have adapted their business models to China’s New Normal will now profit instead from used car sales and servicing revenue.
China’s auto market is going through major change. Tier 1 cities have imposed limits on car ownership, and car use by government officials is being severely restricted. In addition, the lending bubble that drove major growth in recent years is coming to an end.
Perhaps even more importantly for the medium term, a used car market is now developing in China for the first time, as the chart shows:
- Auto sales only began in China relatively recently: there were just 16m cars on the roads in 2000 (green column)
- New car sales rose to 4m in 2005, and then accelerated to 14m by 2010 due to the post-2008 stimulus (blue line)
- The total auto fleet thus doubled from 43m in 2005 to 91m by 2010, and then reached 154m last year
- Now, new car sales are slowing, with volume up just 8% in 2014 to 19m and forecast at only 7% this year
- Instead, used cars are the major growth area, with sales up 16% in 2014 at 6m – double new car growth (red line)
Used car sales have been slow to take off, with just 1.5m sales in 2008. But this is now changing very fast, as higher quality, longer-lasting foreign brands now dominate new car sales. German brands had 27% market share in 2014, versus just 22% market share for domestic brands.
These higher quality cars are now starting to be resold, after the typical 5-year initial ownership. And so used car volume is expected to soar to 11m this year, according to China’s Auto Dealer Association (CADA). These sales are being supported by major foreign manufacturers such as BMW, Audi and Volvo. They have developed Western-style certification services to guarantee the quality of used cars, which will cover 30 cities by next year.
Used car sales are also proving an attractive revenue stream. Audi saw 34% growth in used sales last year, whilst dealers are gaining good profits from used car sales and servicing. These areas are proving far more attractive than new car sales, where 70% of dealers were reportedly unprofitable last year.
China’s auto market will now see major change as a result. Used car sales were just one-third of new car sales in 2014, but this proportion is expected to rise to 50% this year. And CADA expects this momentum to be sustained for the next few years, as used car volume in markets such as the US is typically twice the size of new car sales.
Chinese investors have been quick to pick up on this shift in demand patterns. Online used car retailer Uxin easily raised $170m last month. Its service-led business model based on the internet is expected to prove very popular.
But for every winner, there are likely to be many losers in established industries, as China continues to refocus the economy on its New Normal policies. Those still hoping for a return to stimulus levels of new car sales growth are going to be sadly disappointed.