Uncover Your Eyes. There’s No China Car Crash
(Bloomberg Opinion) -- Calm down, the world’s biggest car market isn’t going to drive off a cliff.
Sales to dealerships in China fell for a third month in September, dropping almost 12 percent from a year earlier, data showed Friday. Retail sales declined 13 percent. Total vehicle sales could now be on track for their first annual drop in more than two decades. Scary stuff. But much of this is a readjustment after years of outsize growth in an industry that churns out more than 20 million cars a year.
It’s perhaps too simplistic to view China’s slowing economy as the sole reason for the retreat. Sift through the data and talk to dealerships, and it becomes obvious: The reality is that the market is just growing up.
A “structural shift” is afoot, as the more technically minded might put it. As the past year has shown, everything and anything doesn't sell in China anymore. American autos have been losing market share, before even considering the impact of the trade war. Japanese brands are finding a new set of buyers. German luxury, meanwhile, still takes home the prize.
It’s not all about a move away from gas-guzzlers: Automakers that have kept a hold on the high-end and sedan segments are faring better. Consumers are turning to electric cars because, well, that's what Beijing wants.
No doubt, sputtering economic growth is pulling back demand in the hinterland where domestic and mass-market manufacturers had been all the rage. A rural slowdown in SUV sales has been steeper than for sedans, as we noted earlier this year. Beijing recognizes this: A State Council document dated Sept. 20 on stirring consumption (especially in the countryside) pointed out the need to spur automobile purchases.
Nor can a credit crackdown be blamed for the cooling of auto demand. Unlike other countries, where credit and car sales are closely related, that relationship isn’t so straightforward in China.
In any case, investors shouldn’t expect a rebound anytime soon. In the past decade, every time the auto industry started showing signs of cratering, Beijing stepped in. In 2009 and 2015, the government raised rural subsidies for cars with smaller engines and put in place a purchase tax incentive, as analysts at Nomura Holdings Inc. note.
While fiscal constraints may rule out such direct support this time, a value-added-tax cut could be in the offing, in addition to import tariff reductions made in July. As BMW AG becomes the first foreign carmaker to take a majority stake in a Chinese venture, the government has promised more support and incentives for the company’s new and existing plants in the country.
Two pockets of the market are holding up: electric cars and luxury brands. BMW Brilliance and Beijing Benz have managed to push up the average industry-wide pretax margin to 10 percent, as we wrote on Thursday. Excluding those two, margins fell to 8.7 percent in the first half. BMW sales jumped 22 percent in the first three weeks of September.
China’s luxury car demand hasn’t turned down, whatever Jaguar Land Rover might say. The U.K. unit of India’s Tata Motors Ltd. simply got the market wrong. The government’s carrot-and-stick policy for electric vehicles is also in full swing, as automakers globally retool to stay on course in the country. So-called new energy vehicles rose 55 percent in September from a year earlier.
Meanwhile, as sales slow overall, inventories and production have started to drop. That’s arguably a healthy trend, keeping price cuts in check.
A look at other markets that have followed a similar trajectory helps recalibrate expectations. There are 20 cars for every 100 people in China now – a level that’s proved an inflection point elsewhere, according to Nomura’s analysis. It should be obvious that the vehicle population won’t grow at the same pace for ever.
Stocks of Chinese automakers are among the worst hit this year, down by almost 50 percent so far. Investors haven’t differentiated: Luxury companies such as Mercedes-Benz partner BAIC Motor Corp. are suffering as much as those, like Great Wall Motor Co., that mostly make SUVs and have been behind the curve for years.
A slower ride can be a smoother ride. Investors should just make sure they’re driving in the right lane.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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