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Double-digit growth unlikely to sustain in the 2nd half

China’s automobile sales in the first half of 2013 registered a 12.3 percent growth compared to the same period last year, to a total of 10.78 million units. Optimists predict that total sales this year would exceed 20 million, a historical record.

But analysts who participated in a market review organized by the Asian Games Village Automobile Mart recently question if the double-digit growth rate in the first half would continue in the next five to six months.

Xu Changming, an analyst with the State Information Center, believes that the double-digit growth rate in the first half is not sustainable. The high growth in the first quarter of the year, Xu argues, was driven by large numbers of dealer deliveries after a considerable depletion of inventory late last year. Dealer sales index was only 83 if the index for 2011 was 100 and there was an obvious slowdown in sales in June. And the country’s macro economy may continue to contract in the second half if no stimulus policies are to be adopted by the government.

Luo Lei, deputy secretary-general of China Automobile Dealers’ Association (CADA), is more pessimistic about the prospects of the market in the remainder of the year. Dealer inventory has been rising since June and end-user sales are declining. Except for most of the JV brands, the majority of the dealers for passenger vehicles are confronted with an inventory index above the safety level.

Analysts believe that a number of factors may affect the automobile market later this year.

First, the State Council’s 10 policy measures to tackle China’s serious air pollution were adopted on June 14 in which local governments are authorized to take emergency actions such as restrictions of automobile driving. If implemented, at least eight large cities, including Tianjin, Shenzhen, Hangzhou, Shijiazhuang, Chongqing, Qingdao and Wuhan, are expected to restrict vehicle registration, according to China Association of Automobile Manufacturers (CAAM). This would mean a reduction in automobile sales in these cities by 25 percent, or 400,000 units and 2 percent of national sales. Additional policies in restricting vehicle driving are also being considered in order to deal with both air pollution and traffic congestion.

Second, China’s new leaders are unlikely to adopt economic stimulus policies any time soon. Premier Li Keqiang has indicated the government’s resolve to focus on enlivening existing assets and reform the economic structure and optimize China’s growth pattern. The exceptional high growth of the automobile sector driven by the ¥4 trillion stimulus packages in 2009 did more harm than good to the healthy development of the country’s auto industry.

Third, the recent credit crunch in June and the arrival of the slow season is adding pressure to manufacturers and dealers as sales and profit margin are down and inventory up. The June Dealer Inventory Alert Index (DIA Index) monitored by CADA was up close to five percentage points, to 56.14 percent. Automobile dealers are pressured from both OEMs which are forcing inventory and from banks which are tightening credit, creating unprecedented financial pressure for dealers.

Fourth, China’s implementation of its CAFE standards will have a great impact on automobile emission and sales, especially sales of imports. The Corporate Average Fuel Consumption (CAFC) was adopted under pressure from both China’s worsening air pollution and China’s growing dependence on imported oil. Beijing Xinkuaibao (Beijing News Express) reports that automobiles currently consumes 55 percent of China’s oil and each year 70 percent of added oil production are used by newly increased automobiles. China’s dependence on imported oil reached 58 percent in 2012.

Fifth, with government encouragement on developing China’s western region, at least six OEMs are building assembly plants in the western provinces with an estimated total investment of ¥34 billion. These new investment projects are likely to add more production capacities to OEMs at a time when market demand is slowing down and overcapacity has already become an issue.

While the sales number in the first six months looks good, it is unlikely to be as good in the coming months. Given the negative factors mentioned above, total sales in 2013 may again fall short of the expected 20 million units.

 

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