Date:08-11 09:45 Source： International Business Dailly Authour：Wu Yue
"Will the domestic auto market, which is sluggish now, take a turn for the better in the second half of the year?" Most of the industry insiders interviewed by IBD expressed cautious optimism, believing that after the slack season of July and August, sales will pick up again during "golden September and silver October".
China's auto output and sales registered year-on-year and month-on-month declines in May and June this year, especially in June, when the output and sales of passenger cars dropped 5.3% and 6.1% month-on-month and 0.7% and 3.4% year-on-year respectively. This was the first time since December 2008 that auto output and sales had decreased for two months in a row, throwing the domestic auto market into a recession overnight. Since the start of 2015, auto output and sales have experienced only one month-on-month increase, in March, with all the other five months declining to varying degrees, and with February registering the heaviest falls of 28.7% and 31.3%. As a result, the China Association of Automobile Manufactures (CAAM) had to lower this year's sales target by four percentage points, with an estimated growth of only 3%.
What exactly has pushed the domestic auto market into a sudden recession? Unless we can answer this question, it will be hard to predict the auto market trend in H2.
Is it because the stock market has absorbed available capital, or is it a periodical decline?
So far there is no consensus as to what has caused the sudden recession in the domestic auto market, but the theory that "the stock market has absorbed the capital" has some validity. According to the Analysis of Overall Auto Market Characteristics 2015 provided by the China Passenger Car Association (CPCA), 350,000 cars were imported in Jan-Apr, down by 19% year-on-year, a rare occurrence in the past ten years. Total consumer spending reached RMB2.23 trillion in the same period, with most consumer sectors maintaining two-digit growth. Auto consumption totaled RMB273.2 billion, up only 2%.
Another set of data from CPCA showed that super-luxury cars slumped 28% in Jan-Apr this year, JV brands saw collective sales decline, luxury cars grew by 13%, and mid and high-end models grew by only 8%.
According to these data, imported cars and super-luxury cars topped the decline, indicating that the wealthiest were putting their money in the stock market. The stock market exceeded 5,000 points in May, creating such strong investor confidence that people were putting more money into stocks rather than buying new cars. When the stock market tumbled in June, all investors lost money and first-time car buyers had no interest in purchasing. This may be a reasonable explanation for the passenger car output and sales decline in May and June.
"The stock market's absorption of capital is only a symptom," said Zhang Junyi, partner of Roland Berger Greater China and auto consulting expert, in an interview with IBD. "The deep-rooted cause for China's sluggish auto market this year is that the auto industry is essentially a periodic industry. The situation was beginning to turn bad last year, and the all-year sales data in 2014 weren't true because the figures represented manufacturers' wholesale volume, while dealers' inventories were generally above the warning level. As it turned out, the bubble soon burst, which was clearly proven by the fact that dealers in several brands told their manufacturers the truth early this year."
Data from the National Bureau of Statistics support Zhang Junyi's view. Fixed assets related to cars increased by 16.6% in 2013, fell to 8.3% in 2014 and stood at 8.4% in Jan-Apr this year, while social fixed assets increased by 20%, 16% and 12% in these same three periods. According to the utilization rate of domestic auto production capacity (2010-2014) provided by CPCA (see attached list), all manufacturers saw greater or smaller declines, with the exception of the Germans.
Continuing slide in auto prices tests manufacturers' systemic capability.
When asked about the auto market trend in H2, Cui Dongshu, Deputy Secretary-General of CPCA, told IBD that auto manufacturers will definitely continue to lower the price, with even bigger redictions than in H1.
"Reducing prices is risky for auto manufacturers. What if the market doesn't respond as expected? The price reduction launched by a few mainstream auto JVs in H1 wasn't very effective." According to Cui Dongshu, "The market didn't respond well mainly because the price reduction wasn't big enough. When the market is in recession, price cutting is the only way to seize market share and turn things around. This is a testing time for auto manufacturers. Whoever moves first will take the initiative in the market."
According to Cui Dongshu, auto sales will definitely go up during "golden September and silver October" because auto manufacturers will act to curb the sales decline and the government will provide policy support. However, government support will no longer be in the form of market rescue measures like those in 2009, but will take effect through economic leverage. According to the Opinions of the State Council on Key Tasks in 2015 for Deepening Institutional Reform, corporate business tax will be replaced by VAT and consumption tax will also be reformed. Therefore, the 17% business tax in the auto industry will be replaced by 3% VAT, and consumption tax will be paid by consumers "outside the price". This will significantly reduce auto manufacturers' tax payments and operating costs, and will give a strong impetus to their R&D and production. Besides, the Opinions also proposes to accelerate interest rate liberalization, which will not only lower the financing cost for auto manufacturers, but also relax the central bank's management and control over auto financing companies. Those companies will be able to engage in benign competition with state-owned and shareholding banks, which is good for boosting market demand.
According to Zhang Junyi, however, price reductions need systematic support. To reduce the price and to determine the degree of reduction, they should first look within their organizations to see how much they can lower their overall operating costs, and whether suppliers are willing to give up some of their profits. Currently, parts producers are making higher profits than main engine producers, the latter having little say over any reduction in manufacturers' recommended prices because this concerns the former's patents, and complicated equity relations among multiple parties. This is one of the reasons why the manufacturer's recommended price is seldom lowered even though dealers have offered massive discounts.
Regarding the auto price in H2, Zhang Junyi told IBD that auto manufacturers will struggle to maintain their price system. Every layer is coming under pressure to reduce prices, while heavy inventories and capital shortage are forcing dealers to lower the prices, which in turn forces manufacturers to provide subsidies. In H2, continuing pressure on sales will force manufacturers to continue these subsidies, and auto price reduction will be out of question.
The key is product power; self-owned brands need support
It should be noted that despite the overall auto market recession in H1, Mercedes-Benz achieved 21.6% sales growth in China. According to analysts, Mercedes-Benz launched 15 new models worldwide and 11 in China this year. It sold 960,000 cars across the globe in H1, up 15.7% year-on-year, and the four locally produced models that accounted for 55% of its sales volume in China all achieved great sales performance. Besides, the channel problem that has troubled the brand for many years has finally been solved. As the world's No.1 luxury car brand, Mercedes-Benz's growing momentum is unstoppable.
Cadillac did a great job in H1 too by selling nearly 40,000 cars, up 14% year-on-year and ranking 5th among luxury cars after JLR. Positioned as a niche high-end brand, Cadillac has continued its growing momentum of last year against the general decline in the auto market, which is something of a miracle. The industry has generally considered GM as having first-class marketing but second-class products, yet according to the media's test drive experience in recent years, Cadillac's product power isn't what it was. What is also impressive is that although the China-Japan relationship remains problematic, Japanese cars saw rising sales volume in H1 even though they didn't join in the price reduction. This is mainly attributed to their significantly enhanced product design and performance, itself a result of their new car strategy.
Thanks to the hot sales of SUVs, self-owned brands sold 4.18 million cars and took 41.5% of market share in H1, up 16.4% and 3.5 percentage points year-on-year. This shows that consumers are willing to pay for good products with advantageous prices.
If we predict the auto market in H2 on the basis of this information, we can expect that while price is of course important, product power remains the dominant element. China today has the most auto brands and models in the world, so intense and harsh reshuffling of the market is just a matter of time. If the current recession forces auto manufacturers to move faster in aligning with the international market in terms of product, price (especially for imported and luxury cars) and after sales service, the recession may not be such a bad thing after all.
According to Zhang Junyi, this periodic adjustment of the domestic auto market may provide a rare opportunity for self-owned brands to become bigger and stronger. Like auto JVs, whether self-owned brands can keep up the hot sales of their SUVs and maintain the market share that they regained after the drop last year depends on their systemic capability. "At the moment, the priority for the domestic auto industry is to carefully consider how to make use of this profound adjustment in the market to abolish local protectionism and encourage self-owned auto manufacturers and uncoordinated local part producers to join hands and work in alliance. The development history of other strong auto-building nations tells us that this is a step that the domestic auto industry has to take sooner or later in order to upgrade itself."
According to CPCA's analysis, regarding self-owned brands the replacement of business tax with VAT in the auto industry will decrease local governments' tax revenues and consequently dampen their enthusiasm for investing in auto projects. This, according to the aforesaid experienced industry insider, is perhaps a good thing. For many years, the main barrier to cross-regional mergers of self-owned brands has been local protectionism. With the new tax system, will local governments loosen the control over former large tax payers which are no longer making big tax contributions? There are still too many uncertainties to answer this question with confidence, and whether substantial progress can be made depends on what major moves the state will make.