According to China Passenger Car Association, new car sales in China plummeted 80% year over year in February 2020. This marked the biggest monthly plunge on record as coronavirus concerns kept showroom traffic very low.
On average, car sales fell to 7,100 units a day during the month compared with 45,000 units per day in February 2019. However, average daily sales improved toward the end of the month, to around 16,000 units per day in the fourth week from 811 units per day early in the month. Reports suggest that the passenger car sales in China tanked nearly 41% through the first two months of 2020, reflecting the largest sales decline in two decades.
Automakers’ Profit Levels to Feel the Heat
Global automakers who have become increasingly reliant on the world’s biggest market for vehicles are left with little visibility into when sales might recover. Weak car sales are expected to take a toll on the earnings of most of the global auto biggies like General Motors (GM - Free Report) , Ford (F - Free Report) , Toyota Motor (TM - Free Report) and Volkswagen (VWAGY - Free Report) among others. German auto giants Daimler AG (DDAIF - Free Report) and BMW AG (BAMXF - Free Report) expect a substantial hit in vehicle sales amid coronavirus woes. Japan-based carmaker Toyota has already reported its vehicle sales in China for February. The company’s China sales dropped 89% year over year to 23,800 during the month. Toyota carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
U.S. top auto companies General Motors and Ford, which command a strong presence in the country, have already been struggling with weak sales in China. Notably, General Motors’ vehicle sales in China recorded the biggest-ever fall in 2019, marking the second consecutive year of decline. Ford’s 2019 vehicle sales in China fell for the third consecutive year, by 26.1%, amid lackluster Chinese economy and the long-standing U.S.-Sino trade tiff. Uncertainty with regard to China’s economic situation prompted people to tighten purse strings, in turn hitting U.S. auto bigwigs. Both these companies had already warned that the challenges are expected to prevail in 2020 as well. To add to the existing woes, coronavirus intensified the pressure on the automakers who were already battling a severe slump in the Chinese market.
It’s not just car sales in China that are being impacted. With around 80% of global car production requiring parts from China, the shutdown in the country has made it difficult for global vehicle makers to source parts required for building cars.
No Quick Fix in Sight
After recording growth for decades, China’s auto market has been faltering since July 2018 owing to tighter emission standards, trade tensions, increasing popularity of ride-sharing platforms and economic downturn. Several structural changes are also affecting China’s auto market. Policy reversals on government subsidies for new energy vehicles upended the market. In July 2019, the government of China 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.
The massive lockdown in the country amid COVID-19 has further jeopardized China’s economic activities. Although the country’s operations are gradually restarting, carmakers are likely to struggle to boost output. Hit by the disruption caused by the coronavirus epidemic, China Association of Automobile Manufacturers forecasts the country’s auto sales to dip more than 10% in the first half of the year and around 5% during the full year.
With the auto sector’s output being a key component in China’s GDP, the nation needs to rev up stimulus measures for boosting sales. These may include reducing car purchase tax, easing emissions standards and offering incentives to purchase new energy vehicles among others.
However, until coronavirus concerns cool down, incentive policies are unlikely to have a major impact on car sales.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. The health pandemic has also raised a wake-up alarm for the automakers who have invested heavily in the country. Striking a balance and diversifying supply chains have become the need of the hour. As the auto industry has been caught off guard this time, companies should start chalking out a proper contingency plan for any such catastrophic event in the future.
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