The latest developments in the Chinese economy ought to be causing some concern in the automotive sector. China’s economy is slowing. GDP grew by 7.4% in the first three months of this year, compared with 7.7% in the final quarter of 2013. Not so long ago China’s economy was growing at over 10% a year. The latest stats show that the less developed central and western provinces of China are being hit hardest by this slowdown. These are the places, remember, that the auto industry has been hoping will propel demand growth as the big eastern population centres become increasingly saturated.
Thus far, the industry in China is mainly in business as usual mode, though domestic brands have been having an increasingly tough time and losing ground.
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Among the small independents, Great Wall could be in trouble. Has it taken short cuts in product engineering that are now throwing up problems? If yes, that could be costly, in terms of both immediate rectification issues and damage to the brand.
CHINA: Great Wall stops Haval H8 orders, suspends share trading
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For foreign makers with big JV investments in China, there is no need to panic. Beijing has plenty of levers at its disposal to give the Chinese economy some stimulus, if needed. China’s leaders have shown before that they are prepared to step in quickly, if necessary, to stimulate domestic demand. It’s the 25th anniversary of Tiananmen Square’s massacre coming up on June 4. The emerging middle-class consumers of China may appear to accept the absence of Western-style liberal democracy, but the other side of the deal is that the economy continues to deliver the material goods and better lifestyles they crave. China’s leadership has also made it very clear that it wants China’s economy to develop a much stronger domestic demand component. Car sales will continue to be a major beneficiary of China’s ongoing economic development, with replacement purchases (usually upgrades) also becoming more significant as the car parc grows.
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By GlobalDataAll things considered, I wouldn’t expect there to be a major downturn in new vehicle demand in China, but there may be a correction of sorts later this year after a very prolonged period of strong market expansion. Slower economic growth is clearly taking time to show up in a dampening of car sales. One reason for that (besides discounting) may be that prospective buyers are sensing more restrictions on sales coming down the line as smog choked cities impose more restrictions on car purchase. Better to buy now, the logic goes, before more restrictions are imposed later.
The analysts at LMC Automotive maintain that more stimulus measures for China’s economy and more car purchasing restrictions in China’s tier-2 cities could push up vehicle sales in the short run, but the higher that vehicle sales are pushed up, the deeper the slowdown will be in the market in the longer run – the “see-saw effect”. The market pause or ‘payback’, when it comes, will be a worry to some. There will be jitters and it could come as early as the second half of this year if the economy decelerates much further in the second quarter. But in that scenario, expect measures to stimulate demand in the second half of the year which could lift sales after that.
CHINA: Weaker economy slows car demand
We could be entering a period later this year when profits from doing business in China come under increasing pressure alongside some industrial consolidation. Some companies may fall by the wayside or be absorbed by bigger groups, with a number of domestic brands disappearing altogether. It was interesting to see one Chinese OEM rationalising its brands recently.
CHINA: Geely Auto unveils single brand strategy
In the longer run, the successful carmakers in China will be the ones with the strongest brands and model ranges who are able to adjust to new – flatter and perhaps more volatile – market conditions.
