China’s “one-child” policy has resulted in an overall decline in the share of working-age people in the population. As growth of the labour force slows, employers have to compete for workers and wages thus continue to rise, boosting household incomes and vehicle demand. The programme has also resulted in smaller households, a notable contraction in the size of the young workforce and an unnaturally high ratio of boys to girls. Neil King, analyst at Euromonitor, spoke to Dave Leggett about the implications for auto sales.
China has one thing in abundance: people. At the last count there were 1.34bn of them. But here’s the thing. Efforts to curb population growth in China have left it with a very low fertility rate and something of a demographic time bomb. Earlier this year China’s National Bureau of Statistics (NBS) announced that the number of working-age Chinese shrank last year by a total of 3.45m. China’s old-age dependency ratio (the percentage of persons older than 65 per persons aged 15-64) has increased from 10.7% in 2000 to 15.1% in 2013 and is set to rise to 23% in 2020, according to Euromonitor.
Go deeper with GlobalData
Discover B2B Marketing That Performs
Combine business intelligence and editorial excellence to reach engaged professionals across 36 leading media platforms.
China’s “one-child” policy, the centrepiece of the government’s efforts at population control, has been in force since 1979 and is claimed to be responsible for averting 400m births. Aside from the overall decline of the share of working-age people in the population, a key impact of this has been the notable contraction in the size of the young workforce. The size of the economically active population aged between 15 and 29 started shrinking in 1992, although it has been expanding again since 2008, albeit very slowly.
The Chinese government is well aware of the adverse economic consequences that this demographic ‘hole’ could have, especially with respect to overall consumption trends. It helps to explain the increasing policy emphasis in Beijing on encouraging the domestic consumption of goods and services. That’s also something that has clearly benefited the Chinese car industry as domestic demand has risen sharply since 2007 (at a time when car demand in North America and Western Europe was faltering).
“The Chinese government has made some progress in building an economy which will allow an increase in consumption over time,” King maintains. “The government has also – cautiously – begun to introduce deregulation of interest rates. The steps are tentative but eventually should help to encourage consumption. China’s plan for a transition from an investment and export-led economy to one that is driven by consumer demand will gain more traction during the current decade.”
Euromonitor forecasts that passenger vehicle sales in China will exceed 18m units in 2013 and the outlook for households by income suggests that demand will exceed 30m units a year in 2020.
A shortage of young workers is driving up wages. Auto industry sources confirm that China is not as low-cost – in global sourcing terms – as it once was. As growth of the labour force slows, employers will have to compete for workers and wages will continue to rise. Already, real wages are increasing by about 10% per year. But that has created a big positive for car demand. “The rise in household incomes has ultimately had a far greater positive impact on vehicle demand than economic growth,” King maintains.
Euromonitor analysis compares the volume of passenger vehicle sales in China against households by income to reveal that passenger vehicle sales have essentially grown in line with the development of the number of households with an annual disposable income over USD10,000. “In fact, demand has actually grown faster than the number of households with a disposable income over USD10,000 since 2010, so a cooling is not out of the question,” King warns. “But the economic backdrop remains pretty positive, with much better access to consumer credit – something which we are also seeing in increasingly affluent provinces such as Jiangsu and Zhejiang, as well as the established megacities.”
What about the impacts of demographic trends on car market segmentation? “Given the usual popularity of small cars among younger people, this has also been a factor in the upsizing trend in the car market,” says King. “That natural pool of young consumers who want a low price small car is – and will continue to be – a lower proportion of the car buying population in China than elsewhere.”
An upsizing trend has been evident in China, with a sharp shift towards MPVs and SUVs since the middle of the last decade, as consumers defect from the traditional small, compact and standard segments. “Between 2006 and 2010, sales of passenger vehicles grew by almost 250% but combined sales of MPVs and SUVs grew ten-fold,” says King. “Many middle-income earners have been attracted to small MPVs and away from city cars. In addition, many consumers who could only afford an entry-level first car have sought to upgrade.”
Households with more than USD45,000 disposable income are projected to grow the most by 2020, with current Euromonitor projections suggesting their number will increase from 14m homes in 2013 to 32m homes in 2020.
King believes that the general upgrading trend is set to continue, as households can increasingly afford more expensive cars.
One segment not expected to do well is full-size MPVs. “Given the one-child policy, households with three persons became the most prevalent in 1993,” he points out. “Households with six or more persons have clearly been in decline ever since the programme was introduced. In fact, the number of such homes has actually halved since the early 1980s, and they became the least common household type in 2000, having been overtaken by single-person homes.
“The car upgrade trend is therefore not expected to extend to full-size MPVs, which, with shrinking households and defection to SUVs, now capture just 1% of the Chinese passenger vehicle market.”
As well as a decline in the size of the young workforce in China, Euromonitor’s analysis of China’s demographics also points to an unnaturally high ratio of boys to girls.
In 2030, according to Euromonitor, males will outnumber women in most age groups under 51 years. “Among those aged under 35, the difference will be particularly pronounced,” King maintains. “As males typically prefer larger cars, this phenomenon should support the upsizing trend in China, along with the income distribution profile and the ageing of the population.”
Euromonitor’s report on China’s demographics and impact on China’s car market
