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May 14, 2015

China's Music Has Stopped for Automakers

China is GM’s largest market.

The People’s Bank of China cut interest rates for the third time in six months on Sunday due to “big downward pressure,” as it said; it wasn’t kidding.

For years, the smartphone market was in a frenzy. The 1.2 billion Chinese consumers couldn’t get enough. In 2011, China surpassed the US in smartphone sales. New brands muscled in. Growth rates were phenomenal. But that’s over. Industry analyst IDC announced on Monday that shipments in the first quarter dropped 4.3% from a year ago. The culprit: “market saturation.”
From now on, selling smartphones in China is going to be a blood sport where companies are fighting for share in a stalled or shrinking market.

But in terms of magnitude, it pales compared to what is happening in the auto market.
After being in the double digits for years, vehicle sales growth slowed to 6.8% in 2014, with total sales hitting 23.5 million; 19.7 million light passenger vehicles and 3.8 million commercial vehicles. No other country has ever come close. In the US last year, automakers sold a glorious 16.5 million passenger vehicles.

That’s how staggering sales growth was in China. All global auto manufacturers have been building new plants and expanding existing ones. Announcements of capacity additions are made on a near daily basis. Automakers invested billions of dollars in China every year. The constraint was capacity, not demand. It was the greatest auto party the world has ever seen. Executives are still intoxicated from drinking too much of the industry’s optimism.

But problems were already bleeding through last year.

Dealers revolted against inventory dumping by foreign automakers who were trying to make sales look better and pressure dealers to sell more. Dealers were suffocating under mountains of inventories and were discounting heavily to get rid of the units. Hence their revolt. Automakers caved, compensated their dealers, and lowered their sales goals – and thus the flow of vehicles to individual dealers, even as they added new dealers.

In the US, monthly auto sales reflect units that dealers deliver to their customers. In Europe, auto sales are based on registrations. In China, auto sales are what the China Association of Automobile Manufacturers reports, and it reports the number of vehicles automakers were able to stuff into their channels.

And on Monday, CAAM reported April sales of 1.7 million units, up a measly 3.7% from a year ago. Growth in the first quarter had been 9%. The statement didn’t speculate on the cause of the sharp slowdown.

Sedans, the largest category, are now officially dead.

Sedan sales plunged 10% in April to 932,000. But sales of the other categories were strong: microvans up 10% to 108,000; SUVs up 49% to 462,000; and MPVs up 22% to 167,000. In January, CAAM still expected light passenger vehicle sales to rise by 8% to 21.3 million units. That now appears to be a pipedream.

For foreign automakers, China plays a big role. Industry consultant IHS Automotive estimated that, in 2013, China accounted for 59% of net profits at Volkswagen, 45% at BMW, and 37% at GM.
GM, for example, sold 939,000 vehicles in China in Q1 through its joint ventures. In the US, it sold 684,000 vehicles. China accounted for 39% of GM’s global vehicles sales, the US for 28.5%! GM has been on a sizzling expansion drive in China: new plants, new models, more production…. For GM, the music plays in China.

Alas, that music has stopped.

In April, according to CAAM, GM sold 258,484 vehicles in China, down 0.4% from a year ago. A similar scenario is playing out for Ford. Total vehicle sales in April were essentially flat at 96,889 vehicles.

It was a mixed bag for other automakers. Audi, the number one luxury brand in China, sold 45,296 vehicles, up a paltry 0.2% from a year ago. Audi has introduced a slew of new models and additional manufacturing capacity to boost sales. And that’s what it got. Number two luxury brand BMW hasn’t reported yet as I’m writing this. But Mercedes, which engineered a management shakeup in China last year, was able to goose sales by 21% to 27,069 vehicles.

While many of the dozens of often state-owned Chinese automakers are in serious trouble, there were some standouts. For China’s biggest SUV maker, Great Wall Motor, sales in April soared 45% to 80,419 vehicles. Its SUV sales skyrocketed 71%, while sedan sales dropped 7% and pickup sales 10%. This brought year-to-date sales growth to 23%. Geely Automobile increased sales by 13% to 40,120 vehicles, with domestic sales soaring 45%, and export sales plummeting 84%, to less than 1,500.

Exports have been in terrible shape.

Exports reached promisingly 1.06 million vehicles in 2012. But by 2014, exports were down to 910,400 vehicles. In addition to the fiasco in key markets Russia and Ukraine, which Geely blamed for the collapse of its exports, sales have struggled in Argentina where the currency has crashed, and in Algeria and Iraq where the price of oil has crashed. It’s tough out there.

So in April, exports plunged 22% from the already week levels last year to 61,600 vehicles. Year-to-date, exports are down 15%, with the slowdown accelerating. The already miserably low export target of 860,000 vehicles for the year has likely moved out of reach.

The culprit that is mauling smartphone sales in China – the dreaded “market saturation” – is starting to move into view for the auto industry. But the auto industry, which has been on an immensely capital-intensive expansion drive, is facing the even more terrible term, the disease that brought down the industry in the US and Europe:


The industry has known for years that someday, this would happen, that the horrendous pace of investment would lead to an error in the calculus, a lack of discipline in the industry, and a return to reality, and thus overcapacity. Pundits have been fretting about it, but executives have consistently said, not yet, maybe never, China is different. Demand by 1.2 billion people would continue to outrun supply even if there is no room to park or drive these cars, even if numerous cities impose limits on registrations, and even if there is no air left to breathe.

But April was a signal for the auto industry to get ready to fight it out in a stagnant or declining market, wrecked by overcapacity. For US automakers, it will be familiar pain from a forgotten time.

China’s imports and exports have plunged, freight rates from China to Europe have collapsed, and the China Containerized Freight Index has dropped below the level of 1998.  Read China Freight Index Plunges to Multi-year Low

Courtesy Wolf Richter at WolfStreet.com (EconMatters archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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