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China Auto Sales Recovery on Shaky Ground: What Lies Ahead?

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Following a surprise increase in passenger car sales in May, which sparked hopes of recovery in the world’s biggest auto market, sales again faltered in June. The retreat in passenger car sales on a year-over-year basis signals the uneven recovery that China is witnessing, following almost a two-year slump that has been worsened by the coronavirus eruption. Sales of electric vehicles (EV) also dropped drastically in June.

Passenger Car Sales Fall Y/Y but There’s Hope

According to China Passenger Car Association (CPCA), passenger car sales in June declined 6.5% year over year to 1.68 million units. Reports attribute the year-over-year decline in sales to the lush incentives provided by automakers during last June. Sales picked up in June 2019 as dealers offered sweet discounts to clear their inventory, which was at the risk of becoming redundant as new emission standards were set to take effect the following month.

The year-over-year decline in passenger car sales is somewhat a setback for the industry, which was betting on demand pickup with the opening of dealerships as the pandemic eased. However, it’s not all gloom and doom.

While passenger car sales declined year over year in June, it did improve 2.6% from the last month’s levels. Notably, sales of passenger cars rose 1.6% year over year in May. With the coronavirus under control, government incentives have helped in boosting sales of the country’s sagging car market, as suggested by the monthly growth. 

EV Sales in a Free Fall but Tesla & NIO Register Gains

Sales of new energy vehicles (“NEV”) — including battery EVs, plug in hybrids and hydrogen fuel vehicles — declined 35% year over year to 85,600 units in June, per CPCA. This marked the 12th straight month of sales decline in the segment. China’s EV market has been faltering since July 2019 due to policy reversals on government subsidies for new energy vehicles. Battery EV sales totaled 67,000 units, down 40% year over year.

While EVs resulted in the overall decline in China auto sales, Tesla (TSLA - Free Report) and its smaller rival NIO Inc. (NIO - Free Report) grabbed limelight by reporting higher sales. Per CPCA, the red-hot EV maker Tesla sold 14,954 Model 3 vehicles in China in the month of June, more than 11,095 units sold in May. That’s indeed impressive, given that Shanghai Gigafactory-manufactured Model 3 May sales more than tripled from April. Tesla’s investment in Gigafactory Shanghai is certainly paying off as the firm captured a bigger chunk of the China-based EV market. Notably, Tesla ended the month commanding 23% of the country’s overall electric vehicle sales. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EV sales of NIO jumped 179% year over year to 3,740 units in June. In fact, the China-based EV maker delivered 10,331 vehicles in the second quarter, surpassing the milestone of 10,000 quarterly units for the first time.

Car Sales in China Set to Bounce Back?

With the auto sector’s output being a key component of China’s GDP, the government has been ramping up stimulus measures for boosting auto sales. The government decided to extend subsidies and tax breaks for new energy vehicles such as electric or plug-in hybrid cars for another two years, as the country considers EVs a priority. Various auto biggies including Tesla, Volkswagen (VWAGY - Free Report) , General Motors (GM - Free Report) , BMW AG (BAMXF - Free Report) and Toyota (TM - Free Report)  are ramping up investments in the China EV market. CPCA expects NEV sales for second-half 2020 to be significantly higher than the corresponding period of 2019.

Amid persistently weak demand in the West (including the United States and Europe), Moody’s credit agency expects faster recovery in the China auto market than the U.S. and European counterparts. In May, the agency cut its forecast of global auto sales but retained 2020 sales estimates for China. While worldwide auto sales are anticipated to decline 20% in 2020 amid coronavirus woes, sales in China are expected to fall 10% year over year but increase 2.5% in 2021. After the country’s auto sales witnessed an improvement in April and May, China Association of Automobile Manufacturers (CAAM) revised sales forecast for 2020. Per CAAM, auto sales are expected to fall between 10% and 20% this year compared with the prior forecast of 15-20% decline.

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