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China Auto Market Slump Persists: Is a Revival in the Cards?

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After decades of blistering growth, China’s auto market has slumped lately amid macro-economic headwinds. Auto sales in China, which is the world’s largest car market, witnessed its second consecutive annual decline of 8.2% year over year in 2019. Sales were down around 3% in 2018, marking the first decline in about two decades.

After recording growth for decades, the wheels are coming off China’s auto market since July 2018 owing to tighter emission standards, trade tensions and economic downturn. In December 2019, car sales in China declined for the 18th time in the past 19 months, with the only gain witnessed in June 2019 as dealers offered discounts to clear inventory.

According to the China Association of Automobile Manufacturers (“CAAM”), a total of 25.8 million vehicles were sold in 2019, marking a decline of 8.2% from a year ago.Sales of passenger vehicles including sedans, SUVs, minivans and multipurpose vehicles plummeted 7.4% year over year to 20.7 million in 2019. Sales of electric vehicles also hit speed bumps, declining 4% to 1.2 million units in 2019, after surging around 62% in 2018.

China Auto Market in Free Fall: Economic Malaise & Policy Changes to be Blamed

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. Rising pork prices have pushed inflation in China to eight-year high in 2019, posing dilemma for policy makers who are trying to boost the weak economy. Contracting imports, exports and industry profits are other weak spots. China’s 2019 export registered the slowest growth in three years amid U.S.-Sino trade tensions and economic downturn. The country’s export rose 0.5% in 2019 versus 10% growth in 2018. Imports dropped 2.8% last year against 16% gain registered in 2018. Reportedly, the world’s second-largest economy is expected to clock 6.1% GDP growth. This indicates a decline from 6.6% GDP growth in 2018, which marked the slowest pace since 1990.

China’s economic slowdown has been intensified due to its ongoing trade war with the United States. Although the trade tiff seems to be easing now with a phase one trade deal reached between the United States and China, things will likely remain under pressure unless the dispute is fully resolved. Slowing economy and trade war tensions impacted consumer sentiment, which is crucial for the sale of big-ticket discretionary items like automobiles.

Apart from domestic weakness and trade tiff, several structural changes are also crashing China’s auto market. Policy reversals on government subsidies for new energy vehicles (NEVs) upended the market. In July 2019, the Chinese government scaled back subsidies from 50,000 yuan to 25,000 yuan for cars with a driving range of more than 400 kilometers. Further, stricter emission rules implemented in July paralyzed the country’s auto sales. Per the rules, all vehicles sold in China are required to meet China 6 standards and the higher prices of such vehicles tamed consumer demand.

How Did Auto Bigwigs Fare Amid China Woes?

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. General Motors’ vehicle sales in China recorded the biggest-ever decline of more than 15% year over year in 2019. After witnessing double-digit sales decline in China last year, the auto giant warned that the China business is likely to face challenges this year as well.General Motors’ rival, Ford’s sales in China also took a hit, declining 26.1% year over year in 2019. The company signaled that the sales figure in China might worsen this year.

Local manufactures also suffered, with BYD Co. and SAIC Motor Corp also recording double-digit sales dip. Amid the industry woes, SAIC Motor, China's biggest car maker in terms of sales, and smaller state-owned car maker GAC recently teamed up to develop next-gen technology in an era of electric vehicles. 

While China woes put some automakers in a tight spot, others fared well. German and Japanese auto giants like BMW Ag BAMXF, Volkswagen, Daimler AG DDAIF, Honda Motor HMC and Toyota Motor TM weathered market downturns better. Volkswagen sales in China inched up 1.7% year over year to 3.2 million in 2019, surpassing General Motors’ 3.09 million units. Notably, Honda and Toyota recorded nearly 9% gain in China auto sales volumes. Both Toyota and Honda carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Is There Any Recovery in Sight?

According to CAAM projections, China auto sales are likely to fall 2% in 2020, which would mark the third straight year of sales decline. The World Bank forecast China's growth to decelerate to 5.9% this year.In addition to a weak economic outlook, tighter terms for vehicle financing, possibility of re-escalation of global trade tensions and increasing popularity of ride-sharing platforms might weigh on car sales.

Conversely, with the pace of decline in China’s auto sales slowing down over the last four consecutive months, some industry watchdogs are of the opinion that the slump in China’s auto market is likely to bottom out soon. On a positive note, subsidies on NEV will stay relatively stable this year and will not be scaled back like last year. This is good news for EV manufactures like Tesla TSLA, NIO Inc. and other automakers who are betting big on green vehicles, as the firms were badly hit by subsidy reductions last year. NEV sales are likely to remain stable or slightly increasein 2020, per CAAM.

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. 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 are waiting with bated breath to witness a rebound in China’s auto market. Until then, they will have to resort to cost containment and other strategies to overcome the resultant challenges.

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