China’s heavy-duty truck sales may reach 760,000 units this year, up 19 percent from last year, representing a volume increase of more than 120,000 units. The unexpected growth rate and volume increase will no doubt headline the commercial vehicle sector and is also worthy of headlining the entire auto industry.
Market rebound grabbing headlines
It is hard to understand the current market. On the one hand, the economic environment is not as good as once thought. On the other hand, monthly heavy-duty truck sales have increased at double digit rates since April. The two months of September and October, the so-called “Golden September Silver October” periods where sales usually shoot up, did exactly that as sales went up 50 and 39 percent respectively over the same previous months.
So what exactly are the reasons for the sudden rebound? Was it pre-buy pushed by the State-IV emissions standards implementation or could it be a real rebound of demand?
We believe the growth has been spurred by a combination of factors, including the slow recovery of the macro economy, especially the rebound of fixed asset investment, the beginning of the coal transport season in September as well as pre-buy effects caused by the implementation of the State-IV emissions standards. Fourth quarter heavy-duty truck sales as a result could exceed 190,000 units, pushing the annual total for 2013 to around 760,000 units, up 19 percent from 2012 (see Exhibit 1 and 2).
Economic indices improving
Even though the macro economy this year can best be described as undergoing a “mild recovery,” various economic indices have shown significant improvement. The market performance of heavy-duty trucks, which we know are primarily used as a production tool, is directly correlated with the economic situation and GDP growth. From Exhibit 3 below, we can see that China’s Purchasing Managers’ Index (PMI) were growing every month from May to October with the exception of a slight decline in June. The PMI remained also above 50 percent in every month for the first 10 months of this year. This shows that economic expansion this year, even though still slow on absolute terms, is much better than last year.
Fixed asset investment, which is closely tied with the GDP, looks normal so far. (In 2012, fixed asset investment year-on-year growth was the lowest in recent years, extremely abnormal for China.) The absolute value and growth of fixed asset investment is the most important driver for the growth of the heavy-duty truck market. Its correlation with heavy-duty truck sales is more direct than any other economic index.
Exhibit 4 shows the comparison of monthly growths of heavy-duty truck sales with those of infrastructure investment. We can see that infrastructure investment growth in each of the first 10 months was positive and growth rates in nine of the 10 months were above 15 percent. In contrast, the growth of this key index was either negative or only in single digit half of the time in 2012.
Exhibit 5 shows that real estate investment, in particular floor space of commercial housing sold, has skyrocketed so far this year, with monthly growths of as high as 49.5 percent. When the housing market grows, it pushes up more reproductive investment, which in turn drives up demand of heavy-duty trucks. Last year, monthly growths of this index, with the exception of July, August, October and November, were all negative.
Furthermore, sales growth for the fourth quarter of 2013 is expected to be high since the sales base for fourth quarter 2012 was low as heavy-duty truck makers focused on clearing out inventory. Heavy-duty truck sales in the fourth quarter of 2012 totaled 142,461 units, averaging only 47,500 per month. That’s the lowest fourth quarter sales among any fourth quarter in the last five years (2009-2013). Third quarter 2012 sales were only 119,958 units, also the lowest of any third quarter sales in the past five years. Manufacturers have finally relieved themselves of the inventory burden and now dealers have more capability to stock new inventories.
Meanwhile, sources reveal that Weichai Power’s production plan of its high-speed engines (for heavy-duty trucks, buses and engineering machineries) for December is more than 40,000 units. Based on Weichai’s market share of 37-38 percent in the heavy-duty truck engine market, plus invoicing of OEMs, average heavy-duty truck sales in November and December are expected to reach at least 65,000 units (higher than that of September, which saw sales of 64,000 units, up 50 percent). Fourth quarter sales, as a result, will exceed 190,000 units, up 33 percent from fourth quarter 2012, or an increase of more than 47,000 units.
State IV emissions standards driving up sales
In addition to the above economic related factors, one other key factor driving up heavy-duty truck sales, especially fourth quarter sales, is the State IV emissions standards. This factor has been in play since June, when manufacturers and dealers started to stockpile State III emissions standards-compliant trucks in anticipation of the implementation of State IV standards starting on July 1. As a result, sales in June, usually a slow month for the market, went up 51 percent to 75,000 units (see Exhibit 6).
In July to September, even though State IV emissions standards were not officially implemented nationally as scheduled, local specific regulations emerged and one province and region after another began to implement the standards and State III-compliant trucks were no longer allowed to be sold and registered in those regions. Therefore, sales in every month in the third quarter included at least some forward invoicing and dealer pre-stocking. Even worse, although more cities and regions are beginning to put into effect the new standards, because of regional differences in economic development vehicle registrars have different inspection equipment for compliance. As a result, some regions are really strict about State IV compliance while others are less lenient and turn a blind eye.
State IV emissions standards for heavy-duty vehicles are generally strictly enforced in regions such as Beijing, Yangtze River Delta, Pearl River Delta, Chengdu and Zhenghzou, but in less developed regions and cities where the standards are allegedly enforced, getting State III trucks registered by paying extra money have become the norm. This utter disorder provides no assurance as far as dealer confidence in future policy expectations is concerned, and even drives up their inclination to stock up on inventory. For the vehicle registrars, many still allow the advanced registration of State III trucks one way or another.
It is likely that State IV emissions standards will play an even more important role in the further quarter. The last two months of the year are usually the time for manufacturers to stock up on inventory in anticipation of the new year. Industry analysts also predict the Ministry of Industry and Information Technology is expected to withdraw all State III-compliant trucks from the national vehicle catalogue. By stockpiling State III-compliant trucks, manufacturers and dealers are trying to minimize the risks brought forth by the elevation of the emissions standards.
Based on the above predictions of fourth quarter sales, China’s heavy-duty truck market in 2013 is expected to reach 760,000 units, up 19 percent from the 636,000 units sold in 2012. No one predicted that this would be the case at the beginning of the year. It also in some way reflects the helpless and sour feeling of manufacturers amid an unstable market and uncertainty in policies and regulations and an unpredictable market in 2014.
(Rewritten by Lei Xing based on author’s article on cvworld.cn)