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China Auto Sales Pick Up in April: Just a Momentary Relief?

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Vehicle sales in China grew in April, putting an end to the 21-month slump that had rattled the world’s biggest auto market. According to China Association of Automobile Manufacturers (“CAAM”), auto sales for April increased 4.4% year over year to 2.07 million units. This is indeed noteworthy for a market that had last witnessed growth in June 2018.

April Sales Offer Some Respite From Freefall

April sales got a boost from commercial vehicles including heavy trucks and buses, partially offset by weak passenger car sales. Several automakers including General Motors (GM - Free Report) , Toyota Motor (TM - Free Report) , Nissan Motor (NSANY - Free Report) , Volkswagen (VWAGY - Free Report) and Mazda Motor recorded a rise in April car sales in China. Nonetheless, EV sales are still lagging behind. EV sales in China tanked 27% year over year in April to 72,000 units, which marks the continuation of the downturn that began in July 2019. According to China Passenger Car Association, Tesla’s (TSLA - Free Report) sales plunged 64% in April. 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.

However, it should be noted that sales of commercial vehicles were up 32% in April. Production and distribution in China have started returning to normalcy after the authorities relaxed travel restrictions and lockdowns imposed in view of the COVID-19 pandemic. With the outbreak under control, government incentives helped in boosting sales of the country’s sagging car market.

It is to be noted that the auto sector of China has been battling a downturn for quite some time now amid tougher emission standards and waning consumer demand in the wake of tariff woes and economic slowdown. Policy reversal on government subsidies and the rollback of tax breaks in July 2018 had paralyzed decades of blistering growth. Severe monthly declines rattled the China auto market, as is evident from its second consecutive annual decline of 8.2% in 2019.

Coronavirus-led shutdown of factories, less customer traffic at dealerships and supply-chain disruption added to the woes. For first-quarter 2020, China’s car sales plummeted 42% year over year as the pandemic pummeled demand and further weakened consumer confidence.

As the auto sector’s output is a key component of China’s GDP, the government took some steps to revive sales. The measures included handing out cash subsidies to encourage people to purchase cars. The government also decided to extend subsidies and tax breaks for new energy vehicles such as electric or plug-in hybrid cars for another two years.

While April sales surged amid increased demand for commercial vehicles and government stimulus, the market is still in a dire situation. Importantly, during the January-April period, 5.8 million vehicles were sold, reflecting a 31% drop from the corresponding period of 2019. Some observers believe that the spike in April sales merely reflects pent-up demand from consumers who could not make purchases during January to March, thanks to the virus outbreak.

But can the recent uptick in sales be called a recovery? Well, the good news seems to be short lived.

Green Shoots May Just Be a Mirage

While the easing of coronavirus-induced lockdown unleashed pent-up demand, prospects still remain cloudy. The country still remains on course for the third consecutive annual drop in car sales. Notably, CAAM forecasts 2020 sales to decline 15-25% year over year, depending on how effectively coronavirus is controlled worldwide through the rest of the year.

While auto manufacturing in China has resumed, much of the world is still battling with low production and halted activities amid coronavirus. Overseas factory closures could cause a shortage of critical auto parts in China, thereby disrupting production in the country.

However, the bigger problem is consumer confidence, which is still fragile. While coronavirus-induced restrictions have eased in China, the virus has ripped apart the world’s second-largest economy, forcing millions of people out of work. While the official unemployment rate stands at around 5.9%, experts believe that as many as 80 million people were out of work at the end of March as a result of the economic damage wrought by COVID-19.

If the pandemic persists into third-quarter 2020, China-based industries are likely to be severely hit. The knock-on effect of the coronavirus rampage will also deal a severe blow to the income of consumers in China. 

As customers’ purchasing power has been decreasing, it is creating an underlying structural problem that is likely to hurt the sales of big-ticket discretionary items like cars for quite some time. Increasing unemployment levels are also adding to the woes. Even the ones who are employed are rethinking their priorities and focusing on curtailing discretionary spending. This presents a major challenge to the industry.

While the government has been ramping up stimulus measures for boosting auto sales, such moves are not likely to yield long-term benefits. Amid economic weakness, declining consumer sentiment and global COVID-19 mayhem, a sustainable rebound in China is unlikely anytime soon.

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