China's Auto Market Revisited

Chinese auto sales grew 4.4 percent last month vs a year earlier, rising to 2.07 million vehicles, according to tabulations released by the government-backed China Association of Automobile Manufacturers (CAAM) on Monday. This is actually better than its preliminary assessment suggested, with the new figure helping put an end to a 21-month slump of declining automotive sales.

Unfortunately for the region, it doesn’t seem to be indicative of a full recovery. In its report, CAAM noted that the rebound may be only temporary. Last month’s figures were primarily elevated by commercial vehicles, which saw record growth at 32 percent (year over year). Passenger vehicles also saw their numbers improve from the month prior, but they still down 2.6 percent in April. The improvement is widely seen as the result of backlogged orders that couldn’t be completed during the most prohibitive period of the pandemic, as well as the Chinese Communist Party ordering more work vehicles to stimulate the economy.

“We don’t see this month’s growth as a normal phenomenon, as the domestic epidemic eased and consumers delayed purchases until recently,” Chen Shihua, CAAM’s deputy secretary-general, explained. “It is difficult to guarantee positive growth in the coming months.”

As stated in our last assessment of the group’s sales estimates, it’s always worth taking official numbers coming out of China with a grain of salt. Government data shows markedly low Chinese unemployment right now, at just 6 percent; analysts say there’s little chance of that being possible after such prolonged and widespread lockdowns. Other nations imposing similar (or even less aggressive) viral countermeasures have seen unemployment rates reach double-digits numbers. Most believe the real unemployment rate in China to be around 15 percent.

A recent Wall Street Journal article, citing economists at Société Générale SA and UBS Group AG, estimated that about one-sixth of the population is currently unemployed inside the country. Meanwhile the automotive industry seems to have returned to some semblance of normalcy. Despite reports that many car factories and parts suppliers are not running at full capacity or with their entire staff, most now appear to be operational. Global manufacturers will likely still have supply chain concerns; problems that will undoubtedly persist as production ramps back up.

There has also been some souring on doing business in China, though this has not affected all car companies equally. While those that got into the market early via joint ventures (e.g. General Motors, Volkswagen) will likely continue their existing relationships, we’ve seen others backing off. Renault announced the end of its joint venture with China’s Dongfeng Motor Corporation in April. While the official reason given was so it could better prioritize electric vehicle production for the region, it has been looking to reduce production (along with Nissan) as part of its restructuring efforts.

China also seems to have hit is growth cap sooner than everyone assumed. Suzuki, which tends to thrive in developing markets and areas that appreciate low-cost, no-frills automobiles, bailed years ago after sales growth failed to manifest. It ended up letting Chongqing Changan Automobile build Suzuki-branded vehicles after backing out of the joint-venture in 2018.

There’s a growing assumption that Suzuki may have been the first of many, too. Despite most large brands taking a whack at the Chinese market, conditions have not been favorable for foreign entities. Most have been under a legal obligation to enter into joint contracts with established Chinese firms if they want to sell within the country in meaningful volumes. While not ideal, it was seen as a way to get into a lucrative market with seemingly unlimited growth potential. We’ve just spent almost two years learning that this isn’t the case.

Even before the pandemic, analysts believed there would soon come a period where outside players operating in China would need to choose to either fully embrace the market or abandon it for greener pastures. The economic ramifications stemming from the coronavirus, will likely force that issue. While some have pointed to large automakers pulling out employees after COVID-19 was announced in China’s Hubei province as evidence of companies becoming cagey about doing business with the nation, it was a universal approach taken by all manufacturers — including ones we wouldn’t expect to snub China anytime soon. Predicting who bails next is probably more easily done by watching for future investments (or lack thereof). Based on the amount of time PSA Group spent in 2019 softening its relationships in China, it might be the next company to watch.

However, China’s recovery is viewed as heartening in the general sense. As the point of origin for the coronavirus pandemic, many believe its market improvements may foreshadow recoveries in other parts of the world. Of course, those assessments presume the data coming out of the country are reliable and ignore how much of an impact government purchasing played. But there are hopeful signs in the passenger market.

Sales of premium vehicles rose 16 percent in April, according to the China Passenger Car Association (CPCA). Meanwhile, sales of mass-market vehicles made by joint ventures that include foreign companies such as Volkswagen and GM fell by 5 percent. Chinese brands saw sales drop 14 percent. This mimics what we’ve seen elsewhere in the world, with high-end models maintaining their sales strength. Our guess as to why? The people who buy them are simply less affected by government lockdown orders.

Electric vehicles were the outlier here. Despite also having a tendency to go to well-heeled buyers, CPCA reported that new-energy vehicles (which includes EVs) fell 30 percent to 64,000 units in April. While an improvement from March’s decline of 49 percent and a 70-percent fall in February, it’s a poor performance for a country that has spent the last six months trying to re-incentivize their purchase after eliminating subsidies in 2019. CPCA also had a bleaker tally than CAAM, suggesting retail sales actually declined 5.5 percent in April.

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