Auto sales recovery in China seems to be gathering steam lately. Per China Association of Automobile Manufacturers (“CAAM”), auto sales for July rose 16.4% year over year to 2.11 million units. This marks the fourth consecutive month of gain registered by the world’s biggest auto market.
China Auto Sales Getting Into Gear After Prolonged Slump
Vehicle sales in China grew in April, putting an end to the 21-month slump. China’s auto market has been faltering since July 2018 owing to tighter emission standards, trade tensions, increasing popularity of ride-sharing platforms and economic downturn. The COVID-19 outbreak — originated in Wuhan — further exacerbated the prolonged demand slump, as is evident from the biggest ever decline of around 80% year over year in February. Auto sales slump was less dire in March, with volumes dropping 43% year over year. As coronavirus concerns crimped showroom traffic, automakers in China suffered their bleakest ever quarter from January through March, with sales tanking 42% year over year to 3.7 million vehicles.
China is the first country to emerge out of the deadly coronavirus. Lockdown in many cities in China got lifted when other cities in the world were either in the shutdown mode or entering it. Once business activities in China returned to normalcy after the authorities relaxed travel restrictions and lockdowns, vehicle sales in the country started picking up. Auto sales recorded a year-over-over increase of 4.4%, 14.5% and 11.6% in April, May and June, respectively. Despite robust sales of late, the industry is still recovering from the decline in the first quarter. As such, for the first half of 2020, vehicle sales slid 17% year over year to 10.3 million units. Nonetheless, things are now looking up for the China auto market.
What’s Aiding China Auto Market?
Sales rebound extended into July, driven by strong stimulus from the government and a robust recovery in the demand for commercial vehicles. With the auto sector’s output being a key component of China’s GDP, the government has been ramping up stimulus measures for boosting auto sales. The measures include handing out cash subsidies to stimulate people for purchasing cars, encouraging sales expansion in rural areas, enhancing support for personal auto consumption credit and loosening purchasing restrictions.
Sales of big ticket discretionary items like passenger cars, trucks and vans are extremely cyclical in nature. Improving consumer confidence and the overall country’s economy are aiding sales. Notably, China’s GDP returned to growth in the second quarter. The economy grew 3.2% in the said period, following a 6.8% decline in the first quarter. Further, people in the country now prefer private transportation and are increasingly opting for new car purchases, thanks to coronavirus impacts. The use of public transportation in cities like Beijing and Shanghai has declined significantly from pre-COVID-19 times.
It should be noted that Japan-based auto bigwigs including Toyota TM, Honda HMC and Nissan NSANY witnessed year-over-year sales increase of 19.1%, 17.8% and 11.6%, respectively, in China during July. All the three companies carry a Zacks Rank #4 (Sell).
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Green Shoots of Recovery Seen in EV Sales
The main highlight of the July auto report in China was the growth in NEV (new-energy vehicles), which rose 19.3% year over year to 98,000 units. This marked the first monthly gain over a year. China’s electric vehicle (EV) market had been faltering since July 2019 due to policy reversals on government subsidies for new energy vehicles. This indeed offers a glimmer of hope for the China auto market, which has laid out ambitious targets for EVs.
China, which produces the maximum carbon emissions, has laid much emphasis on green vehicles and wants about 25% of new cars sold by 2025 to be electrified. Industry watchers have been quite optimistic about China’s progress in the transition toward EV future. In April, the government of China announced plans to extend subsidies and tax breaks for NEVs such as electric or plug-in hybrid cars for another two years to spur sales.
Growth in EV sales in China during the last month was largely led by Tesla TSLA and BYD Co Ltd. BYDDY. Growth in green vehicle sales is welcome news for various auto biggies including Volkswagen VWAGY, General Motors GM, Tesla, BMW AG and Toyota that are ramping up investments in the China EV market.
What Lies Ahead?
Buoyed by favorable government policies, promotional efforts by automakers and improving consumer confidence and economy, industry experts expect the rebound in vehicle demand and sales to continue in the second half of 2020. However, amid weak overall sales volumes during the first half of the year, total sales will decline for the third straight year in 2020.
Per CAAM, auto sales are expected to fall between 10% and 20% this year compared with the prior forecast of 15-20% decline. But experts have warned that a second wave of coronavirus could aggravate the decline, and disrupt the country’s exports and supply chain. CAAM forecasts NEV sales of 1.1 million units for 2020, suggesting a year-over-year decline of 11%.
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