The auto sales slump in China, which is the world’s largest car market, refuses to die down. In more than two decades, vehicle sales slid for the first time in China in 2018 and the country’s car sales are likely to fall again this year amid macro-economic headwinds. Markedly, in September, car sales in China sank for the 15th time in the past 16 months.
Let’s delve deeper.
China’s Auto Market Crashing: Domestic Weakness & Trade War Sting
According to data provided by China Association of Automobile Manufacturers (“CAAM”), auto sales fell 5.2% year over year to 2.27 million in September. This followed year-over-year decline of 6.9% and 4.3% in August and July, respectively. Per CAAM, sales of sedans, minivans, sports utility vehicles and SUVs in the global industry’s largest market fell to 1.9 million. Waning consumer demand in the wake of tariff woes and economic slowdown is dragging down the country’s vehicle sales.
Let’s take a closer look at the latest inflation data and other economic indicators for China. The country’s economic malaise is reflected in September inflation data, which released yesterday. Notably, the country’s consumer inflation climbed to its highest levels in nearly six years amid rising pork prices. China’s factory deflation also deepened in the month, with producer price index declining 1.2% year over year, marking the third month of contraction in a row. Contracting imports, exports and industry profits are other weak spots. Meanwhile, the country’s economic slowdown has been intensified with its ongoing trade war with the United States. While a partial trade deal on Oct 11 offered a ray of hope, the trade tensions are still very much prevailing and not expected to wane anytime soon.
With the economic slowdown and U.S-Sino trade tiff, China’s auto market has been faltering like never before. Sales of new energy vehicles (“NEV”) including all-electric and plug-in hybrids declined around 34%, dropping for the third-consecutive month, due to a fall in government subsidies for purchases of such cars. Notably, NEV sales increased for 18 consecutive months till mid 2019, when it fell 4.7% and 15.7% in July and August, respectively. This is especially a matter of concern for China, which is targeting 60% of all automobiles sold in the country to run on electric motors by 2035. The ballooning EV market could burst, which is a concern for electric car makers like Tesla (TSLA - Free Report) and Nio Inc. (NIO - Free Report) .
Affected by the sluggish Chinese economy, automakers are reeling from declining demand of cars in China. Slowing economy and trade war tensions have impacted consumer sentiment, which is crucial for the sale of big-ticket discretionary items like automobiles.
China Woes Put Automakers in a Tight Spot: GM & F in Focus
Uncertainty with regard to the economic situation in China prompted people to tighten purse strings, in turn hitting U.S. auto bigwigs like General Motors (GM - Free Report) and Ford (F - Free Report) . Both General Motors and Ford carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
U.S. top automaker General Motors’ sales in China tumbled 17.5% year over year in the July-September period. In addition to weak demand and trade tiff, increasing competition also impacted the company’s sales in China. In fact, year to date, General Motors’ sales in China have fallen 15.8%, with the company reporting negative sales growth for five consecutive quarters. In a bid to restore sales, the company has targeted to launch 20 new and refreshed models in China this year.
General Motors’ rival, Ford’s sales in China also took a hit, declining 30.3% year over year in the third quarter of 2019. Notably, Ford’s sales in the country have been on a decline since 2007. A weak auto market and trade-war politics continued to worsen Ford’s ongoing slump in China. To revive its position in the country, the firm plans to launch more than 30 new models through 2021.
More Bumps Ahead?
While some industry watchdogs are of the opinion that the slump in China’s auto market is likely to bottom out soon, there are no signs of a turnaround yet. With every new data coming out of the country pointing to a slowdown in the economy, there is not much optimism. In fact, per Reuters, China’s auto sales could witness negative to low growth over the next three years amid low consumer confidence and trade tiff with the United States. The 19-month old trade tussle between the United States and China is yet to reach a conclusion.
In addition to a weak economic outlook, tighter terms for vehicle financing and increasing popularity of ride-sharing platforms are also likely to weigh on car sales. With the auto sector’s output being a key component in China’s GDP, the government is likely to provide support in the event of a prolonged downcycle. In fact, the slowdown did prompt the Chinese authorities to take measures for boosting auto sales in order to kickstart the sputtering economy. For instance, China’s State Council asked the local governments to gradually relax restrictions on auto sales, support the purchase of NEVs and expand the second-hand car market in the country to prop up the auto market. The efforts have not yielded the required results yet and carmakers are waiting with bated breath to witness a rebound in China’s auto market.
While China still needs to rev up stimulus measures for boosting sales, improvement in the economy and consumer spending, along with the U.S.-Sino trade truce will be crucial for the auto sector to recover from the slump. Automakers will have to be prepared for a prolonged period of weakness and resort to cost containment and other strategies to overcome the resultant challenges.
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