Growth rates are slipping for China’s auto industry, but domestic and global manufacturers remain committed to the huge market.
Liang Dongmei, Caijing 22 January 2009
After enjoying double-digit growth for nine consecutive years, China’s auto industry is skidding on the ice of an economic winter.
Among the first affected by slipping sales in 2008 was Beijing Automotive Industry Holding Co. (BAIC), China’s fifth largest automotive group and a partner with South Korea’s Hyundai.
Their partnership Beijing Hyundai posted a 53 percent sales decline between June and July, when only 16,100 vehicles rolled off dealer lots, according to the China Passenger Car Association. Standalone Hyundai sales in China fell 30 percent over the same period, to 17,400 units.
BAIC Chairman Xu Heyi forecast a better market after the Beijing Olympics in August. But his hopes were dashed as sales grew only slightly year-on-year in October before declining again in November and December.
Of course, the industry’s chill has been felt around the world. Most multinational automakers are cutting back.
China remains a relatively warm spot for the industry. None of the world’s big carmakers have announced plans to cut investments in China, which is not only the world’s second largest market but remains a field ripe with potential. Total sales topped 9.3 million in 2008.
“There is no doubt that we will pay more attention to the Chinese market,” said Yasuaki Hashimoto, president of Japanese automaker Nissan.
Nissan’s plan includes a 2009 sales growth target that’s in line with last year’s 20 percent increase. In addition, according to the Xinhua news agency, the Dongfeng Nissan joint venture owned by Nissan and China’s Dongfeng Group this year plans to inject 1.04 billion yuan in Zhengzhou Nissan to boost its registered capital.
Yet the Chinese auto market’s ability to maintain what had been double-digit growth is now being seriously tested. Auto sales rose a relatively meager 6.7 percent last year, making 2008 the first year in which sales growth failed to reach double digits in nearly a decade.
Last November was the worst for the nation’s car producers in 11 years, said Li Chunbo, an auto industry analyst at CITIC Securities in Beijing. And the market’s growth rate for the first 11 months of the year was the lowest for that period since 2000, he said.
Yet many of the world’s automakers are still pinning hopes on China, which means the competition for slices of a shrinking pie are bound to intensify.
Target Cuts
The pie got a lot smaller in 2008. Sales growth slowed significantly for almost all foreign automakers doing business in China. Domestic companies also felt the pinch.
According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in November plunged 14.5 percent from a year earlier to 685,100 units. That marked a 4.2 percent month-on-month decline.
Despite a 6.1 percent increase in sales to more than 1 million units in 2008, the Chinese venture of General Motors -- GM China – slipped below the industry average with a 12.4 percent decline in volume from 2007. Joint ventures Volkswagen China, China Toyota, Honda China and Ford also saw their growth rates decline.
Some manufacturers adjusted 2009 sales targets downward. Non-Nissan subsidiaries of Dongfeng Group, such as Dongfeng Shenlong and Dongfeng Kia, cut targets by up to 20 percent each.
In addition to lowering targets, many Chinese automakers reported layoffs and wage cuts in November. These included Chery, Jianghuai and Shenlong. Many manufacturers are extending worker holidays during the Spring Festival period for what they’re calling “equipment repair and maintenance.”
Just a Phase?
Analysts point to a link between the latest downturn and the global financial crisis. But they also cite the current phase of the industry’s development in China. The nation’s cooling economy merely accelerated consolidation and other elements of a downward phase of the cycle in a sensitive market, they argue.
The history of American automakers has proven the cyclical nature of the industry, with downturns preceding broader economic crises. Usually, the industry’s recessions and recoveries take more time than those in the general economy, said Tan Jijia, an analyst at Pacific Securities.
More specifically, CITIC’s Li thinks the downturn is mainly a result of deteriorating fundamentals in the global economy.
“China’s auto industry has been really affected by the financial crisis, especially exports of automobiles and auto parts,” Li said.
Li also blames lower income expectations among consumers. His view was shared by authors of a recent Bohai Securities report, which said rising prosperity over the past two years in China led to greater expectations for high incomes, which in turn led to excess demand. Now, as expectations wane, auto sales are slowing.
However, industry optimists note that China’s inventory remains relatively low and its growth rate, although down, stands in sharp contrast to the 20 percent decline in auto sales in the United States in 2008.
And there’s a lot of room for growth. Some 34 vehicles for every 1,000 people rolled down Chinese roads in 2007, far below the 123 per 1,000 recorded in Brazil and an average 120 cars per 1,000 people worldwide. Ratios in the United States and Japan exceed 700 per 1,000.
China’s wide wiggle room can be explained through a purchasing power analysis based on the so-called R-value index. The index, which is figured by dividing passenger vehicle price by per capita GDP, calculates trigger points for auto sales growth to gauge the purchasing power of a country’s consumers.
Research by Pacific Securities shows consumer purchasing power strengthens as a country’s R-value declines. When an R-value falls to an index of 2 or 3, an auto market can be expected to enjoy rapid growth. When an R-value falls below 2, market growth will likely cool.
The R-value in Japan was 2 in 1961, and its auto market saw an average annual growth of more than 10 percent during the following decade.
China’s R-value decreased to 5.8 in 2007 from 14.9 in 2003. During that time, car sales jumped to 5.31 million from 1.97 million, yielding a four-year compound growth rate of 28 percent. This statistic points to the huge potential for market development.
Based on this analysis, the Chinese market’s next growth phase will center on regions with R-values between 3 and 5. These include Zhejiang, Guangdong, Jiangsu, Shandong, Liaoning and Fujian provinces, as well as the Inner Mongolia Autonomous Region. The combined population of these seven regions is about 418 million.
Regions with R-values below 3 in 2007 included Beijing, Tianjin and Shanghai – three relatively wealthy urban areas with a combined population of around 46 million.
Government Backing
Optimistic about the industry’s future, the Chinese government hopes to guarantee development of the domestic car market. To that end, the State Council approved January 14 a policy support plan, injecting confidence into 2009 forecasts.
The plan included a cut in sales taxes, to 5 percent from 10 percent, for cars under 1.6 liters bought between January 20 and December 31. The plan also encourages large auto companies as well as major auto-parts makers to optimize resources and improve international competitiveness through mergers and acquisitions.
Analysts think the incentives will make a difference. Thomas Schiller, managing director for the consulting firm Arthur D. Little in China, expects the policy to encourage buyers and contribute to a 6 percent increase in passenger car sales in 2009. Previously, he had predicted negative growth for the year.
CITIC’s Li said vehicles subject to the tax reduction account for nearly half of the country’s passenger cars sales.
Alternative Energy
China’s industry is also hedging bets on alternative energy vehicles, particularly electric cars. Manufacturers have invested heavily in electric vehicle research and development, and the market is taking shape.
Eight hybrids have reached the Chinese market, including three brands made in China: the Chang’an Jiexun, the Chery A5BSG, and the F3DM made by BYD. Foreign brands include the China GM Buick Lacrosse, Toyota Prius, Toyota/Lexus LS600HL and RX400h, and the Honda Civic Hybrid.
Alternative vehicle makers are also looking overseas. Car producer BYD, for example, got a premier spot in the main hall alongside the world’s biggest carmakers at the 2009 North American International Auto Show in January in Detroit.
The plug-in hybrid F3DM and all-electric E6 displayed at the show by BYD attracted a lot of attention. The New York Times used the expression “small exhibition, big dream” to describe the Detroit displays of BYD and China’s Brilliance Auto.
The F3DM went on sale in China on December 15 and is expected to reach the North American market in 2011. The export model’s estimated price of US$ 22,000 would be close to the 149,800 yuan that customers pay in China.
BYD also plans to launch the E6 all-electric vehicle on the U.S. market by 2011. This is a battery powered, mid-sized crossover with a single-charge range of 250 miles.
The global market is still dominated by non-Chinese hybrids such as the Toyota Prius which, since its launch in 1997, has grabbed nearly 80 percent of the U.S. market for hybrids. More than 1 million Prius cars have been sold worldwide in the past 12 years.
Despite tough competition, the alternative market offers good opportunities for China’s auto manufacturers. Research in this field is just beginning, and a gap of only 10 years in research and development divides China and other countries with major car industries.
In the all-electric field, China is already a leader in battery technology. Thus, China’s position in the global industry may improve tremendously thanks to alternative energy cars, says Chen Qingtai, director of the Development Research Center at the State Council, and a former chairman and CEO of Dongfeng Group.
The government’s latest industry revitalization plan calls for focusing the nation’s alternative energy development strategy on electric vehicles. Li Chunbo thinks policymakers should define “electric cars” as all-electric vehicles, excluding hybrids and hydrogen fuel cell vehicles.
The industry sees hybrids as transitional products for a market that will be dominated by all-electric vehicles in the future. Companies that take the lead in producing inexpensive and convenient all-electric vehicles with long driving ranges and changeable batteries are expected to dominate the future market.
Wang Jinning, a manager at Dongfeng Nissan, told Caijing his company does not plan to enter the hybrid market but plans to launch all-electric vehicles in 2010 on the global market, including China.
U.S. automaker Ford showed its commitment to China in December by signing a memorandum of understanding with Chang’an Automotive Group in Beijing. The companies agreed to cooperate in developing alternative energy autos, including hybrids and all-electric cars.
Ford CEO William C. Ford Jr. was once quoted as saying that “no one dares” overlook the alternative energy auto market since the entire market “is heading in this direction.”
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Carmakers Clutch Wheel as Market Slides
Growth rates are slipping for China’s auto industry, but domestic and global manufacturers remain committed to the huge market.
Liang Dongmei, Caijing
22 January 2009
After enjoying double-digit growth for nine consecutive years, China’s auto industry is skidding on the ice of an economic winter.
Among the first affected by slipping sales in 2008 was Beijing Automotive Industry Holding Co. (BAIC), China’s fifth largest automotive group and a partner with South Korea’s Hyundai.
Their partnership Beijing Hyundai posted a 53 percent sales decline between June and July, when only 16,100 vehicles rolled off dealer lots, according to the China Passenger Car Association. Standalone Hyundai sales in China fell 30 percent over the same period, to 17,400 units.
BAIC Chairman Xu Heyi forecast a better market after the Beijing Olympics in August. But his hopes were dashed as sales grew only slightly year-on-year in October before declining again in November and December.
Of course, the industry’s chill has been felt around the world. Most multinational automakers are cutting back.
China remains a relatively warm spot for the industry. None of the world’s big carmakers have announced plans to cut investments in China, which is not only the world’s second largest market but remains a field ripe with potential. Total sales topped 9.3 million in 2008.
“There is no doubt that we will pay more attention to the Chinese market,” said Yasuaki Hashimoto, president of Japanese automaker Nissan.
Nissan’s plan includes a 2009 sales growth target that’s in line with last year’s 20 percent increase. In addition, according to the Xinhua news agency, the Dongfeng Nissan joint venture owned by Nissan and China’s Dongfeng Group this year plans to inject 1.04 billion yuan in Zhengzhou Nissan to boost its registered capital.
Yet the Chinese auto market’s ability to maintain what had been double-digit growth is now being seriously tested. Auto sales rose a relatively meager 6.7 percent last year, making 2008 the first year in which sales growth failed to reach double digits in nearly a decade.
Last November was the worst for the nation’s car producers in 11 years, said Li Chunbo, an auto industry analyst at CITIC Securities in Beijing. And the market’s growth rate for the first 11 months of the year was the lowest for that period since 2000, he said.
Yet many of the world’s automakers are still pinning hopes on China, which means the competition for slices of a shrinking pie are bound to intensify.
Target Cuts
The pie got a lot smaller in 2008. Sales growth slowed significantly for almost all foreign automakers doing business in China. Domestic companies also felt the pinch.
According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in November plunged 14.5 percent from a year earlier to 685,100 units. That marked a 4.2 percent month-on-month decline.
Despite a 6.1 percent increase in sales to more than 1 million units in 2008, the Chinese venture of General Motors -- GM China – slipped below the industry average with a 12.4 percent decline in volume from 2007. Joint ventures Volkswagen China, China Toyota, Honda China and Ford also saw their growth rates decline.
Some manufacturers adjusted 2009 sales targets downward. Non-Nissan subsidiaries of Dongfeng Group, such as Dongfeng Shenlong and Dongfeng Kia, cut targets by up to 20 percent each.
In addition to lowering targets, many Chinese automakers reported layoffs and wage cuts in November. These included Chery, Jianghuai and Shenlong. Many manufacturers are extending worker holidays during the Spring Festival period for what they’re calling “equipment repair and maintenance.”
Just a Phase?
Analysts point to a link between the latest downturn and the global financial crisis. But they also cite the current phase of the industry’s development in China. The nation’s cooling economy merely accelerated consolidation and other elements of a downward phase of the cycle in a sensitive market, they argue.
The history of American automakers has proven the cyclical nature of the industry, with downturns preceding broader economic crises. Usually, the industry’s recessions and recoveries take more time than those in the general economy, said Tan Jijia, an analyst at Pacific Securities.
More specifically, CITIC’s Li thinks the downturn is mainly a result of deteriorating fundamentals in the global economy.
“China’s auto industry has been really affected by the financial crisis, especially exports of automobiles and auto parts,” Li said.
Li also blames lower income expectations among consumers. His view was shared by authors of a recent Bohai Securities report, which said rising prosperity over the past two years in China led to greater expectations for high incomes, which in turn led to excess demand. Now, as expectations wane, auto sales are slowing.
However, industry optimists note that China’s inventory remains relatively low and its growth rate, although down, stands in sharp contrast to the 20 percent decline in auto sales in the United States in 2008.
And there’s a lot of room for growth. Some 34 vehicles for every 1,000 people rolled down Chinese roads in 2007, far below the 123 per 1,000 recorded in Brazil and an average 120 cars per 1,000 people worldwide. Ratios in the United States and Japan exceed 700 per 1,000.
China’s wide wiggle room can be explained through a purchasing power analysis based on the so-called R-value index. The index, which is figured by dividing passenger vehicle price by per capita GDP, calculates trigger points for auto sales growth to gauge the purchasing power of a country’s consumers.
Research by Pacific Securities shows consumer purchasing power strengthens as a country’s R-value declines. When an R-value falls to an index of 2 or 3, an auto market can be expected to enjoy rapid growth. When an R-value falls below 2, market growth will likely cool.
The R-value in Japan was 2 in 1961, and its auto market saw an average annual growth of more than 10 percent during the following decade.
China’s R-value decreased to 5.8 in 2007 from 14.9 in 2003. During that time, car sales jumped to 5.31 million from 1.97 million, yielding a four-year compound growth rate of 28 percent. This statistic points to the huge potential for market development.
Based on this analysis, the Chinese market’s next growth phase will center on regions with R-values between 3 and 5. These include Zhejiang, Guangdong, Jiangsu, Shandong, Liaoning and Fujian provinces, as well as the Inner Mongolia Autonomous Region. The combined population of these seven regions is about 418 million.
Regions with R-values below 3 in 2007 included Beijing, Tianjin and Shanghai – three relatively wealthy urban areas with a combined population of around 46 million.
Government Backing
Optimistic about the industry’s future, the Chinese government hopes to guarantee development of the domestic car market. To that end, the State Council approved January 14 a policy support plan, injecting confidence into 2009 forecasts.
The plan included a cut in sales taxes, to 5 percent from 10 percent, for cars under 1.6 liters bought between January 20 and December 31. The plan also encourages large auto companies as well as major auto-parts makers to optimize resources and improve international competitiveness through mergers and acquisitions.
Analysts think the incentives will make a difference. Thomas Schiller, managing director for the consulting firm Arthur D. Little in China, expects the policy to encourage buyers and contribute to a 6 percent increase in passenger car sales in 2009. Previously, he had predicted negative growth for the year.
CITIC’s Li said vehicles subject to the tax reduction account for nearly half of the country’s passenger cars sales.
Alternative Energy
China’s industry is also hedging bets on alternative energy vehicles, particularly electric cars. Manufacturers have invested heavily in electric vehicle research and development, and the market is taking shape.
Eight hybrids have reached the Chinese market, including three brands made in China: the Chang’an Jiexun, the Chery A5BSG, and the F3DM made by BYD. Foreign brands include the China GM Buick Lacrosse, Toyota Prius, Toyota/Lexus LS600HL and RX400h, and the Honda Civic Hybrid.
Alternative vehicle makers are also looking overseas. Car producer BYD, for example, got a premier spot in the main hall alongside the world’s biggest carmakers at the 2009 North American International Auto Show in January in Detroit.
The plug-in hybrid F3DM and all-electric E6 displayed at the show by BYD attracted a lot of attention. The New York Times used the expression “small exhibition, big dream” to describe the Detroit displays of BYD and China’s Brilliance Auto.
The F3DM went on sale in China on December 15 and is expected to reach the North American market in 2011. The export model’s estimated price of US$ 22,000 would be close to the 149,800 yuan that customers pay in China.
BYD also plans to launch the E6 all-electric vehicle on the U.S. market by 2011. This is a battery powered, mid-sized crossover with a single-charge range of 250 miles.
The global market is still dominated by non-Chinese hybrids such as the Toyota Prius which, since its launch in 1997, has grabbed nearly 80 percent of the U.S. market for hybrids. More than 1 million Prius cars have been sold worldwide in the past 12 years.
Despite tough competition, the alternative market offers good opportunities for China’s auto manufacturers. Research in this field is just beginning, and a gap of only 10 years in research and development divides China and other countries with major car industries.
In the all-electric field, China is already a leader in battery technology. Thus, China’s position in the global industry may improve tremendously thanks to alternative energy cars, says Chen Qingtai, director of the Development Research Center at the State Council, and a former chairman and CEO of Dongfeng Group.
The government’s latest industry revitalization plan calls for focusing the nation’s alternative energy development strategy on electric vehicles. Li Chunbo thinks policymakers should define “electric cars” as all-electric vehicles, excluding hybrids and hydrogen fuel cell vehicles.
The industry sees hybrids as transitional products for a market that will be dominated by all-electric vehicles in the future. Companies that take the lead in producing inexpensive and convenient all-electric vehicles with long driving ranges and changeable batteries are expected to dominate the future market.
Wang Jinning, a manager at Dongfeng Nissan, told Caijing his company does not plan to enter the hybrid market but plans to launch all-electric vehicles in 2010 on the global market, including China.
U.S. automaker Ford showed its commitment to China in December by signing a memorandum of understanding with Chang’an Automotive Group in Beijing. The companies agreed to cooperate in developing alternative energy autos, including hybrids and all-electric cars.
Ford CEO William C. Ford Jr. was once quoted as saying that “no one dares” overlook the alternative energy auto market since the entire market “is heading in this direction.”
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