2011 – How tough a year is it for China’s auto market, and what is in for the future?

　　By Klaus Paur

　　With barely 5 percent sales growth in the first three quarters of the year, the Chinese auto market in 2011 has been facing a mission impossible in maintaining its breathtaking development path seen during the previous two years. Although a slowdown was expected, mainly due to the elimination of government incentives, the market deceleration was stronger than anticipated, and has increasingly triggered concerns among industry observers about the auto market’s future development potential.

　　The question about an optimal growth for the auto market is difficult to answer. We can assume that growth rates above 30 and 40 percent, as seen in the last two years, are not sustainable, as infrastructure and traffic management cannot keep up with the fast development. Beijing has become an appalling example about how an initially positive market environment with promising demand structure can turn into a nightmare for consumers, government, and eventually car manufacturers likewise – a situation that can easily spread to other cities. While demand was “artificially” boosted in the first place by granting purchase subsidies and generous access to bank loans, the purchase restrictions subsequently imposed through a lottery system likely are not able to solve the existing problem. This indeed raises uncertainties about future development.

　　On the other hand, given the contribution of the auto industry to the economic development of the country, its market growth needs to run ahead of GDP growth to ensure support for achieving the annual target. Assuming an intended 8 to 9 percent GDP growth, the auto market should run in double-digit numbers, presumably at around 12 to 15 percent.

　　An assessment of the current performance requires a distinct look into the 2 major pillars of the auto market – passenger- and commercial vehicles – whose purchase dynamics are significantly different from each other.

　　The passenger vehicle sector, the driving force within China’s auto market, has recorded a year-to-date growth of around 11 percent. Despite a noteworthy slowdown compared to 12 months ago (2010 YTD: 44 percent), this year’s double-digit growth can still be considered healthy, even if slightly undervalued. This is mainly due to underperformance in the mini-car segment, historically dominated by Chinese car brands, and most sensitive to the removal of purchase incentives, as well as in the upper-medium business car segment. Latter has been heavily hit by the Japanese earth-quake at the beginning of the year, as Japanese car makers, the major players in this segment, have suffered most importantly from supply chain shortages and were not able to maintain the necessary volume levels. This structural weakness has been removed now, and recent monthly sales figures point to a positive development towards the end of the year, not least through marketing efforts from all manufacturers to launch new appealing product offers in the marketplace.

　　SUV- and luxury car segments have performed beyond the 20 respectively 30 percent mark so far this year. This has underlined a sound demand structure particularly in the more affluent consumer segments, less price-sensitive than low-end car buyers. While demand is supposed to remain healthy for the remaining months in 2011 and for the coming years, a sales slowdown can be expected, though, due to an anticipated more moderate economic development in the future and a tightening monetary policy that reduces easy access to bank loans and makes credits more expensive.

　　Nevertheless, all in all, the perspectives for the future development in the passenger vehicle market can be judged positive. Sustained economic growth will help more Chinese households to increase their incomes and surpass the threshold to afford a car; this means that first-time buyers will continue to play a major role in new car sales. In addition, as time moves forward, early car buyers will strive for vehicle replacements, that not only benefits new car sales, but also influences the development of the used-car market. A critical issue for the continued growth will be the enhanced geographical coverage towards the inner mainland provinces and lower-tier cities.

　　Yet, there is also a major threat that must not be underestimated. Car manufacturers, tempted by steep growth rates and the perspective of large sales numbers, have been ramping up production facilities to boost vehicle output. A healthy market development in terms of infrastructure and traffic management issues can quickly lead to dangerous overcapacity and car price deterioration. Admittedly, car makers face the difficult challenge to correctly forecast the market development in the next years, with a too cautious policy leading to a potential loss of market shares, when consumer demand volumes cannot be satisfied.

　　Based on current market developments, we can assume that capacity shortages will not really be an issue in the commercial vehicle sector in the next future. In fact, light commercial vehicles as well as medium-and heavy commercial vehicles have seen their sales figures decline in the three quarters of 2011, signifying a volume contraction or, as we call it, “negative” sales growth.

　　The mini-bus segment, contributing almost half to the light vehicle sector, have tremendously benefitted from recent purchase incentives , and seen record sales in the past 2 years. Subsidies have accelerated the renewal of the vehicle fleet, but also motivated small business owners to anticipate a new vehicle purchase. As a result, purchase decisions, planned for this year, have already been materialized, and, consequently, push current sales volumes downwards.

　　Medium- and heavy truck sales are most directly correlated with economic development and infrastructure investment policies. The government’s economic recovery program launched in 2009 has led to replacement decisions and enhancement of vehicle fleets that have boosted sales volumes significantly. Not surprisingly, this boom in new vehicle purchase was only temporary, and cannot be sustainable over time.

　　In summary, the Chinese auto market in 2011 passes through a re-adjustment phase after 2 extraordinary years of growth. Commercial vehicles are supposed to return to growth logic, provided the Chinese economy will continue its positive development path and grow healthily over time. A huge pent-up demand for private car ownership and still untapped market potential in the less developed regions in the mainland also let us assume that the passenger car market looks at a bright future. Nevertheless, exaggerated growth rates, experienced during most favourable economic circumstances in the recent, should not be expected.