Serving the World's Largest Emerging Automobile Market
Home > Heavy Duty > China’s heavy truck market to 2025: volumes set to stagnate more than 30 percent below peak levels (II)

China’s heavy truck market to 2025: volumes set to stagnate more than 30 percent below peak levels (II)

Change in structure of Market & Truck Fleet

China’s new economy and the rising tide of larger fleets will require different vehicles – probably a higher proportion of road tractors, and certainly better specified vehicles. More exacting regulatory requirements and higher content drives the rise in ASPs. This implies the fast disappearance of the ‘low-end’ market, which for this purpose we define as tractors below ¥300,000 ($46,153) and rise of the ‘Medium-High/High End’ market (we are defining as above ¥400,000 currently). Even these definitions are changing rapidly as low-end used to represent those below ¥200,000 and ¥250,000 – which have been rapidly disappearing.

<An increasingly capable road transport vehicle fleet (in 1,000 units). Sales of Higher specified Tractors (LEFT), and Share in total Road Tractor Parc by ASP Category (RIGHT)>
Source: CAAM, China MoT, TIR Estimates & Calculations

The change in the new vehicle market will also be reflected in the truck fleet. As low-end vehicles form a smaller proportion of the working truck population, and high-end vehicles increase rapidly, China’s truck parc will become much more capable. Our point is simply that upgrading of sales comes with implications for fleet utilisation, as the increasingly rich vehicle population both (i) can and (ii) must work harder to justify the higher acquisition costs which have been incurred. To some extent, the Chinese truck market is thus likely to trade volume with price. 

Some truck maker analysis has suggested faster and further changes in truck mix. If so, it would have to come from truck operators, as we think the industry will work hard to hold the regulated price increase requirements to <15 percent, with State-V and State-VI and other regulation currently envisaged. The speed at which the market can absorb higher discretionary content is likely to be influenced by the pace of economic change as well as structure of purchasing. At this stage, we take a conservative line: so far truck purchasers have proved highly price conscious, while their revenue base suffers from falling rates, amidst a widespread deflationary environment for producers in China.

<Potential Mix Changes, Heavy Trucks: Tractor Average Prices & Price Bandwidth>

Source: Trade Press and Published Reference Prices, Registration data as compiled by CBU for Mix, TIR Estimate

Competitive Trends: domestic brands continue to dominate

China’s truck industry is on course to remain firmly in the hands of local brands, the opposite of what has happened in the passenger vehicle industry. China has regarded truck production as a strategic industry. The established global truck makers from Europe, Korea and Japan have mostly had to cede control of brand as the entry price in their JVs. This particularly impacts export potential: the car JVs have discovered they have very little leverage in prompting exports of their Chinese built vehicles. The Chinese partners seemingly in control of major JV truck

makers have left themselves the option of exporting independently or, as negotiated, exporting via JV partner distribution channels. 

Even so, industry structure looks far from stable. Despite a certain cooling of industry prospects, ambitious enterprises, often egged on by provincial or municipal aspirations, are entering the fray. XCMG has been rotating from pure construction equipment focus into heavy trucks; Lifan is an imminent new entrant; JMC is a prospective one. A consolidation trend is not obvious, just as it has not characterised the last decade, in contrast to trends in other parts of the world. 

We have heard many argue that the Big five, who have long achieved a combined market share of >80 percent, will probably grow larger still. Indeed an expert survey very recently recorded 73 percent of respondents believing these five would reach 90 percent minimum market share by 2025. We disagree, unless we see government step in more directly. The trend is more likely up than down, and we have some gains for some of these five built into forecasts. But today’s best performing manufacturers at present are well outside this group:  Dayun for Heavy Trucks (sales have fallen only minimally ytd) and Chongqing Lifan in Medium Trucks (up >60 percent ytd). Nimble management counts, and the room for the fastest to develop is arithmetically most likely to come from the shares enjoyed by current leaders.

Regional Footprints

China has been home to at least four, and occasionally five, of the world’s top 10 heavy truck markets in the last five years. Some individual provincial heavy truck markets are very large indeed – notably Hebei and Shandong. Nationally, China appears a highly competitive market ripe for consolidation. Yet market shares are often skewed towards the historical production base of major manufacturers. Regional markets offer more protection, but are on average close to a European ‘moderate’ concentration level. There are major outliers, for instance in Jilin and Guangxi, where a major manufacturer (FAW and Dongfeng, respectively) has a ‘home market’ dominance (near 70 percent and 60 percent share, respectively). Neither of these markets are especially large, but it is one major reminder that the Chinese national market is more an agglomeration of regional markets than one single homogenous market. Thus FAW and the company once carved out of it, namely Dongfeng, are not as fierce competitors as national statistics suggest, generally having complementary strengths and weaknesses. This regional bias is a partial brake on the consolidation so widely expected.

<Several Manufacturers show high regional concentration of Market Share: Comparison of Market Share by Province to National Market Share for FAW & Dongfeng, 2014.>
Source: Registrations Data, as compiled by CBU. Deep Color = High Market Share relative to Manufacturer’s National Market Share. Light Color= under-represented. 

<Regional Distribution of Chinese HDT (GVW >14t) Domestic Sales>
Source: derived from Registration Data, as compiled by CBU

Capacity Utilisation

The truck industry, like a number of SOE-dominated sectors, appears over-invested and to carry significant excess capacity. For heavy trucks, where there were some prominent capacity-adds post the 2010 boom and where current demand shrinkage is high, we calculate a current utilisation rate of around 28 percent. This may fall to 25 percent in 2016. This compares to a latest (e.g. Fourin) estimate of 78 percent utilisation rate for passenger cars, for instance.

<Estimated Chinese Heavy Duty Capacity and Capacity Utilisation Ratio, 2007-2020>
Source: Company Reports & Releases, CAAM Data, TIR Estimates; Data for Trucks>14t GVW only

Low as these figures seem, they are not unheard of in the global truck industry, where strong swings in demand are not uncommon. One difference is that this low utilisation rate arose during a period of still robust economic growth (according to official statistics). Most industry participants seem to regard the weakness as at least partly temporary, due to State-IV implementation, and therefore likely to tend to self-correct. If we are right about the weak short-term outlook, however, and in believing volumes will remain constrained for the next decade, that will not offer much relief. Given the overwhelming SOE status of the industry, indeed, elimination of the capacity overhang looks a distant prospect. This is another major impediment to improvement in pricing on a five-year view.

What if China’s Economy experiences a ‘Hard Landing’

What can go Wrong? A vocal minority of economists and other observers of China either question the accuracy of current growth indicators, or predict sharper slowdown ahead than embodied in our forecast. China’s truck sector would probably be a prominent casualty of any failure to manage economic rebalancing and de-leveraging of the economy smoothly. 

In our Hard Landing alternative case, we assume Chinese growth slows sharply in 2016, and instead of being brought under control by policy stimulus, continues to slow in 2017, bottoming at near 3 percent for the year. We feel this scenario has respectable antecedents. IMF economists have already suggested that the consequences of delaying structural reforms and rebalances could be an economy tumbling to 3.5 percent growth by 2020 in their ‘low scenario’ of June 2014. An ‘accident’ to the Chinese economy, most likely as a result of over leverage amongst enterprises or local governments in the event of a real estate crash, has also been modelled by some central banks.

<China Truck Sales in the event of a Hard Landing for the Economy: Alternative Scenario>
Source: IMF World Economic Outlook; CAAM, TIR Estimates; April 2015 forecast represented in light blue and published in TIR Preliminary Report, China Heavy Trucks 2025.

Step back a decade in a Hard Landing Scenario: Sustained slowdown in growth through 2017 on truck sales could take the market back to 2006 levels momentarily, on our estimates. While it is possible that a State-V ‘pre-buy’ could protect volumes in 2017 itself, the payback would be a 2018 market going back a decade or more in volume terms, as it falls below 400,000 units. Simultaneous low points in the regulatory cycle and the economic cycle in this case could have a reinforcing effect on each other. In the mid-term with economic growth chugging along at 3-4 percent, we forecast the market settling around 550,000 average annual rate. This is not a central case, but we think a far from implausible possibility.

Scale of possible contraction could attract government support. We have to ask ourselves whether this potential scale of contraction, to around one-third of the 2010 peak, would be allowed to happen. Could there be intervention targeted specifically to the truck sector? Truck building seems to have more political support than e.g. construction equipment, where markets are already a third of peak levels. ‘Green’ subsidies which have the dual function of stimulating truck sales (like so many scrapping schemes, or early take up incentives for new environmental standards) could find a role. A forecaster’s dilemma, but we have not assumed such ‘avoidance tactics’ in our present analysis. In any event, in a real low growth environment there might be many calls for ‘special treatment.’

| | | | | |

Leave a Reply