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The “new norm” for the auto industry

Auto sales growth further slowed in October, according to data released by China Association of Automobile Manufacturers (CAAM) on November 14.

Sales in October rose slightly year-on-year, by less than 3 percent to just under 1.99 million units. Through to October, sales totaled nearly 18.99 million units, up 6.58 percent. While that volume nearly equates to the 19.3 million units sold in all of 2012, the growth pace was off by more than 4 percentage points compared with the 10.7 percent growth in the first two months of the year.

Even with a slight uptick in the remaining two months, expected due to seasonality factors, sales for the year are unlikely to grow by more than 7 percent over last year’s level of just under 22 million units. This means the market will fail to reach 24 million many had expected earlier in the year.

In addition to the general market slowdown, recent government moves may create further impediment for market demand in China.

On November 12, China and the U.S. reached a landmark climate change agreement in which China has set a target for its carbon emissions to peak around 2030 and the U.S. plans to cut its own emissions by 26-28 percent by 2025 from the 2005 levels.

Next year, China aims to achieve a passenger vehicle corporate average fuel consumption (CAFC) level of 6.9L/100 km, to be further reduced to 5.0L/100 km by 2020, as specified in China’s Energy-Saving and New Energy Vehicle Industry Development Plan (2012-2020).

The government is particularly serious about the CAFC targets, considering that CAFC has not improved significantly in recent years. According to the Ministry of Industry and Information Technology (MIIT), the CAFC for 2013 was 7.33L/100 km, a meager 0.05L improvement over that of 2012. More than a third of the 111 passenger vehicle manufacturers and half of the 26 importers failed to meet the targets. Facing possible suspension of new models and capacity expansion approval from MIIT for failing CAFC targets, manufacturers are expected to downsize engines and opt for turbocharging and vehicle electrification.

While China will remain as the largest new vehicle market in the world, the “new norm” for automobile sales in China will be characterized by mild growth and structural transformation. Many of the 100 or so automakers in China that are not ready to face this “new norm” are likely to lose out and disappear as China’s auto market consolidates.

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