Bloomberg Television, March 2. 2016
Bloomberg Television, March 2. 2016
You have probably read, in the Financial Times and elsewhere, that China is the world’s largest car market.
It is not. It is the world’s largest new car market, with sales of 21.1m units last year compared with 17.4m in the US. When used cars are included, the US auto market swells to more than 40m units, against less than 30m total passenger car sales in China.
In value terms, the gap between the two markets is even larger. In 2014, the overall value of US car sales was almost $1.2tn, more than twice as large as China’s $470bn.
This is not surprising, considering that two-thirds of cars on Chinese roads are less than five years old and 80 per cent of all buyers are first-time drivers. The latter fact explains why crossing an intersection in China can be a harrowing experience for pedestrians.
Put another way, an industry that most Americans, Europeans and Japanese have grown up with and now take for granted does not yet even exist in China. Dismiss a shady character as a “used car salesman” and most Chinese people will not understand the reference.
As Chinese leaders gather at their annual parliamentary session later this week, it is worth bearing in mind that they are doing so in a country where one cannot very easily buy a used car.
That fact should reassure Chinese politicians and multinational executives worried about the pace of growth in the world’s second-largest economy, which will be a topic of much discussion at the National People’s Congress.
Government officials insist that the rising “new economy” will balance out the declining “old economy”, allowing the country to grow at an average rate of 6.5 per cent through 2020. The creation of entirely new industries will further support growth.
The inevitable rise of what will soon be the world’s largest used car market is one such example. While its emergence will initially cannibalise some new car sales — primarily those of cheap domestic brands — the potential for growth is huge. In most developed auto markets, there are at least two used car sales for every one new car sale. In China the ratio is inverted, with roughly three new car transactions for every used car sold.
Another new industry whose time should come soon is China’s private jet sector, which is a fraction of the size of its US counterpart.
But the development of business aviation has been constrained in China by the military’s grip on airspace and many of the smaller airports best suited for private jets. Similarly, a giant new used car market will not spring up by itself. Complicated financial reforms will need to be hammered out in order to facilitate its development.
As Janet Lewis at Macquarie Securities in Hong Kong points out, while regulations governing the sale of used cars vary from province to province, in general dealers must act as brokers between sellers and buyers. That is because value added tax would be incurred if they took temporary ownership of vehicles, putting further strain on already tight cash flows.
When such wrinkles are finally ironed out, the inevitable surge in Chinese used car sales will also benefit car manufacturers now contending with a “new normal” of falling margins in what has historically been their most lucrative market.
In developed economies, ancillary activities including maintenance, trade-ins and used car sales have helped dealers sustain profits as new car margins are squeezed. But in China dealers have too often been, as industry consultant Bill Russo puts it, “dogs who just want to be fed”, solely reliant on buoyant new car demand.
When the going got tougher over recent years, dealers demanded ever bigger discounts and one-off subsidies from their manufacturer suppliers. By contrast, in the boom years after the global financial crisis, China was one of the few countries where to own a car dealership was to collect a lazy economic rent. The pickings were so easy that in at least one recent high-profile corruption case, a senior official’s son was gifted a stake in a Toyota dealership.
The emergence of a proper Chinese used car market will help everyone from the ruling Communist party by boosting economic growth, to the world’s largest multinational carmakers by boosting dealer profits. Who knew that used car salesmen could be such an asset to society?
Gao Feng Insights Report, January 2016
We are pleased to share with you our paper titled: Digital Disruption in China’s Automotive Industry. Recent advances in mobile connectivity, big data and social networks have infiltrated the traditional automotive industry and are beginning to redraw the competitive landscape among traditional hardware companies and digital “disruptors”.
The traditional automotive industry, where technology innovation has primarily been focused on powertrain and safety systems, must now contend with new forms of mobility services that are transforming the business model of the auto industry. The conventional hardware-centric, sales-driven, asset-heavy, and ownership-based business model with sporadic customer interactions is being superseded by more connected, on-demand, cost-effective, personalized mobility services. This new form of “connected mobility” is driving new technologies in the areas of navigation, analytics, driver safety, driver assistance and information virtualization.
China’s automotive industry is at the forefront of digital disruption as this transformation is happening much faster in China than the rest of the world, and China will leapfrog to a new era of personalized and electrified mobility. The unique context of China’s urban transportation challenge, the high rate of adoption of mobile device connectivity, combined with the rapid and aggressive introduction of alternative mobility and ownership concepts will compress the time needed to commercialize smart, connected car technology and related services. These conditions may permit China to “leapfrog” to towards a new era of personalized and electrified mobility.
We welcome your comments and feedback on our briefing paper or in general about our firm. We would be glad to meet you in person to share our data and perspectives in a fuller manner. Please let us know if you are interested in meeting and discussing directly how we can help you to operationalize these insights.
Thought leadership is core to what Gao Feng does. We will, from time to time, share with you our latest thinking on business and management, especially as it relates to China and China’s role in the world.
Managing Director, Gao Feng Advisory Company
Chairman and CEO, Gao Feng Advisory Company
Tel: +86 10 5650 0676 (Beijing); +852 2588 3554 (Hong Kong); +86 21 5117 5853 (Shanghai)
The New York Times, January 21, 2016
SHANGHAI — General Motors Co. opened a Cadillac factory in China on Thursday to target the country’s growing but crowded luxury car market.
The 8 billion yuan ($1.2 billion) factory operated with its main Chinese partner, Shanghai Automotive Industries Corp., will have an annual production capacity of 160,000 vehicles, GM announced.
Cadillac began selling in China in 2004, coming late to a luxury market dominated by BMW, Mercedes Benz and Volkswagen’s Audi.
China is the biggest auto market by number of vehicles sold but last year’s sales growth slowed to 7.3 percent, jolting an industry that looks to this country to drive revenue.
“We do firmly believe that there is a strong potential for luxury (cars) in China,” said Matt Tsien, president of GM China. “Last year, obviously it’s been a challenging market overall, not just for luxury but the overall market has moderated.”
The factory is due to begin producing Cadillac’s CT6 model next week. Cadillac makes two other models, the XTS and ATSL, at factories in Shanghai.
Tsien said China’s luxury vehicle sales could grow to 3.5 million vehicles a year by 2020, which would make it the biggest luxury market.
Cadillac says its sales in China rose 17 percent over the previous year to just under 80,000 vehicles.
“At some point you have to make the decision to be in the premium segment in China because it is going to be the, still, the highest growth opportunity in the world,” said industry analyst Bill Russo of Gaofeng Advisory Co. “It’s, frankly, a segment that offers a lot of margin opportunity in spite of the fact that there is pricing pressure.”
AP researcher Fu Ting contributed.
The Financial Times, January 6, 2016
Beijing plans to shake up the domestic car market by relaxing restrictions on dealers so they can sell vehicles from multiple makers.
China’s Ministry of Commerce, which oversees car sales, has published for public comment rules that would bar manufacturers from forcing unilateral sales quotas on dealers or requiring them to take on unpopular models or inventory. Dealers would also be permitted to stock cars from more than one manufacturer and sell excess stock to each other.
Global carmakers are already facing a challenge in the world’s largest market as China’s economic slowdown and vehicle licensing restrictions in many big cities start to eat into years of reliable profits.
Yu Jianliang, a China-based motor industry analyst, said: “This is really good news for car dealers and will reduce their business risk.
“Car dealers in China have less say and more restrictions than their foreign peers. But now the industry is in a downturn and dealers are complaining a lot about pressure on their business. The draft policy could ease that.”
The draft rules would also benefit smaller manufacturers, enabling them to sell their cars through distributors of more popular brands without having to build up a sales network independently, analysts said.
“In the short term it will boost dealer confidence and in the long term, [I expect] it will bring more models to the market,” said Mr Yu.
The measures would be in line with efforts over the past few years to increase competition in the market, with Beijing penalising some foreign vehicle and parts makers for what it said was anti-competitive behaviour.
Multinational groups are already under pressure from steps by authorities to legalise so-called parallel imports of cars that manufacturers originally intended to sell in other markets, but which make their way into China at a substantial discount.
Bill Russo, a Shanghai-based motor industry consultant, said the dealer rules, if adopted, would be a “major move that is consistent with the themes of recent years including the recent anti-monopoly campaign and permitting parallel imports”.
“They are attempting to give more leverage to dealers, as well as create price competition,” he added. “Pricing and margins have been high in China relative to other markets, and this will serve to change that.”
Shanghai, China, November 19, 2015
Gao Feng’s Managing Director and Auto Practice leader Bill Russo will deliver a keynote speech titled “China’s Automotive Industry in Transition: Is the Golden Age Over?” at 10:00 AM.
Topic: China’s Automotive Industry in Transition: Is the Golden Age Over?
Following a decade of rapid growth that culminated in a stimulus-driven surge in demand in 2009-2010, the China auto market sharply decelerated, with growth slipping to 2.5% in 2011 and 4.3% in 2012. This brief slowdown was followed by 14% growth in 2013 and 7% growth in 2014, with overall sales exceeding 23 million units. While the market growth has been spectacular, there are rising concerns on the sustainability of this performance as the market may be approaching a saturation point in the traditionally strong coastal regions. Intense competition among automakers as they pursue emerging growth opportunities in specific regions and segments is anticipated. Mr. Russo will address opportunities and challenges faced by different competitors as they deal with this a transitional period in the world’s largest automotive market.
The Financial Times, November 11, 2015
Patti Waldmeir in Shanghai
Beijing’s stimulus plan for the Chinese car market helped October motor vehicle sales to grow at their fastest pace in 10 months, driven by a tax cut on small cars.
Chinese car buyers have been holding back on purchases of big-ticket items such as cars, while consumer spending on other items remained strong on the mainland, which today celebrated another record “single’s day” shopping holiday.
However, the industry has seen some signs of recovery in recent months, with October motor vehicle sales rising 11.8 per cent year-on-year, to 2.2m vehicles, according to the state-backed China Association of Automobile Manufacturers. This was an acceleration from the 2.1 per cent pace recorded in September.
Sales of sport utility vehicles, the fastest-growing segment and a car popular with the rapidly growing middle class, rose more than 60 per cent in October over the same month a year ago.
Bill Russo, a motor industry consultant in Shanghai, said: “There’s a bounce because of the tax reduction and . . . there has been a trend, even in the slowdown period, of high growth in SUVs, particularly recently launched vehicles in that category are doing quite well.”
Beijing is counting on consumers to boost economic growth as the Chinese economy shifts toward more consumption-led growth. But sentiment among car buyers had been more negative than that affecting other consumers in recent months, with some saying they were waiting for prices to fall.
Beijing responded to weak demand by halving the tax on vehicles with engines of 1.6 litres or smaller to 5 per cent — a measure in place until the end of next year. The tax cut came into effect on October 1.
China’s leaders adopted a similar strategy of cutting taxes on small-engine vehicles in response to the 2008 global financial crisis, launching several boom years for the Chinese car market.
Mr Russo said: “The tax reduction is . . . designed to do two things, stimulate demand in a slowdown but also encourage people to buy a higher mix of locally branded cars” since local automakers’ product portfolio is skewed towards the smaller end.
Tax cuts are likely to boost demand from now until the end of 2016, he said, but added: “My concern is what happens to demand in years to follow, demand may be pulled forward from 2017 into 2016.”
But Yu Jianliang, an independent motor industry analyst, predicted that the boost might not last all next year. “The market is now in the downswing of the business cycle so the policy effect might only last for half a year,” he said. Carmakers were also trying to attract customers by offering more flexible instalment terms and reducing commission charges, he added.
Additional reporting by Jackie Cai
by Andy Sharman, Motor Industry Correspondent
China’s stock market crash this week brought a jolting end to an uncomfortable summer for most of the world’s carmakers, who in past years had enjoyed a smooth ride in the industry’s most profitable market.
For the luxury marques, though, the pain had begun a while back.
A crackdown on ostentatious consumption had threatened to depress sales for the likes of Bentley and Rolls-Royce, ever since Chinese president Xi Jinping launched his anti-corruption campaign in 2013.
This year, the impact has started to show. “Everyone’s really hurting,” says one executive at a luxury carmaker.
A combination of a slowing economy, restrictions on registration plates in larger cities to ease congestion, and increasing consumer appetite for domestic brands — all against the backdrop of the anti-corruption drive — have created a difficult environment for western manufacturers.
“All of these factors have a more direct correlation to sales than a volatile stock market,” says Bill Russo, a Shanghai-based consultant.
Even so, the sudden deceleration in Chinese car sales came as a surprise to some — not least when sales went into reverse in recent months. In July, car sales fell for a second consecutive month, by 6.6 per cent, according to the China Association of Automobile Manufacturers.
Some analysts believe that the scale of the decline is such that multinational manufacturers such as Volkswagen and BMW — respectively the parent companies of Bentley and Rolls-Royce — will be forced to warn on profits in the coming weeks.
“Please keep in mind that we still have some drama ahead of us,” says Max Warburton, an analyst at Bernstein Research.
It amounts to a startling turn in fortunes for the car industry.
But registrations of luxury and ultra-luxury vehicles were down almost 10 per cent year-on-year in the first six months of 2015, based on figures from Bernstein Research.
A devaluation of the Chinese currency has not helped, making already expensive European cars even more so.
This has taken a heavy toll on exports of British-made models. Bentley, which counts China as its second-biggest market, reported worldwide first-half sales down almost 12 per cent to 4,600 units. It was a similar story at Rolls-Royce, for which global deliveries fell 10 per cent to about 2,000 cars in the first half. Neither manufacturer breaks out six-month sales by country, but domestic peer Jaguar Land Rover offered a window to the state of the world’s largest car market: sales in China were down 27 per cent in the first half.
Not all luxury car brands have suffered such declines. Porsche, maker of the Cayenne sport utility vehicle, reported sales up 48 per cent in the first half of the year.
But volumes to not tell the full story. China’s economic headwinds have already created what analysts describe as a “hyper-competitive” market. Porsche has admitted that dealers, independent of the company, have been cutting the price of its Panamera sports car by as much as 20 per cent. Chinese pricing website Bitauto also carries examples of Bentley Flying Spurs and Rolls-Royce Wraiths discounted by a similar percentage.
To put that in context, in the past, western luxury cars typically sold at a premium to their list prices in China.
For some companies, this turnround is already having an effect. China accounts for more than 60 per cent of JLR’s earnings before interest, tax, depreciation and amortisation, according to Bernstein — and the country’s slowdown has caused net income to almost halve at parent company Tata Motors. Similarly, Bentley’s operating profit fell from €95m to €54m in the first half.
Both companies, however — having ridden the tide of rising wealth in China for several years — are outwardly calm.
“Don’t worry,” said Wolfgang Dürheimer, Bentley chief executive, speaking to the FT last month. “Of course we need to take the slowdown of the market seriously but . . . I strongly believe in the Chinese market. There are some changes going on at present, but on the long-term view it will be a very profitable basis for us.”
Industry executives point to low car density — less than one in 10 people drive in China — and a still growing middle class as growth opportunities. Bentley and Rolls-Royce, for example, plan to launch SUVs — increasingly the vehicle of choice in China — over the next two years.
Amid the turmoil this week came another cause for optimism. Alongside the interest-rate cut announced on Tuesday by the China’s central bank was a targeted intervention in the car industry: the country reduced by 300 basis points the reserve ratio required to be held by auto financing and leasing companies, potentially increasing the funds available to car buyers in the country.
It seemed to suggest that China was committed to supporting car sales. But with two-thirds of premium auto purchases still made in cash, the impact may initially prove limited.
The Guardian, August 1, 2015
Shanghai: the roads are impressive but car sales are not motoring.
Photograph: Bloomberg via Getty Images
Business appears to be slow at the Mercedes-Benz showroom in the Jing’an district of Shanghai. There are no customers and the staff look bored. A family comes in to look at the cars but appears to have no intention of buying. A salesperson is tight-lipped when asked whether they are seeing fewer customers through the doors.
Car sales in China are slowing after years of rapid growth, and have slumped in the last few weeks. According to the China Association of Automobile Manufacturers, numbers sold in June fell 5.3% from May; this drop coincided with the stock market crash that saw the Shanghai Composite Index lose 14% in July. The association previously estimated that sales would grow 7% this year; now it thinks that figure will only be 3%.
A number of international car manufacturers such as Peugeot, Citroën and Ford have warned of sluggish sales in China, while Audi lowered its global sales forecast last week because of slumping demand there. State media reports that some companies have been cutting prices since April in an effort to boost sales.
The sales staff at the Mercedes-Benz dealership would also not comment on whether they had been offering discounts. However, there were signs offering new deals for lower interest financing when purchasing some of the more expensive models on display.
Bill Russo, managing director of management consultancy Gao Feng Advisory Company, confirms that the sector is slowing down. The recent stock market crash is “noise in the system”, he says, but admits that “there could be a short-term impact”. Nonetheless, he believes that the industry should be optimistic about China: “The expansion of the market will be guided by the number of people who have enough money to buy a car, and that number will grow.”
The economic slowdown is also having an impact on the luxury goods market and there are concerns that the share crash will make it worse. “The luxury market has been in slowdown mode since 2012, the start of the anti-corruption campaign,” says Liz Flora, editor-in-chief of Jing Daily, a website covering the luxury industry in China. She adds that the crash “throws a new wrench into the system, and brands are worried it will create even more problems in terms of consumer confidence”.
At the Gucci store at the IAPM shopping centre on Huaihai Road in Shanghai on Friday, there were no customers. It is the largest Gucci store in China; on its two floors, sales staff were chatting to each other and two lingered by the entrance, ready to pounce on anyone walking in.
Many luxury brands have outlets in the IAPM centre, one of Shanghai’s most prestigious addresses. In the Prada store there were a few customers looking at bags but they were outnumbered by staff by two to one. In contrast, the shopping centre itself was buzzing, with many people strolling around, and the food court was doing brisk business.
Mr Kong and Mrs Li were walking around leisurely having a chat. They were in the mall “to take a walk”, said Mrs Li. “I don’t buy designer goods but my daughter does.” Wang Cheng was heading to the Nike store and said he didn’t think most people were there to shop. “Most are here for the air conditioning,” he laughed: temperatures this summer have hit almost 40C.
The Financial Times, July 27, 2015
The catalyst for this pessimism was a sharp fall-off in year-on-year sales — 9.4 per cent higher in March, but 3.4 per cent lower by June than the same month last year, according to wholesale figures compiled by the China Association of Automobile Manufacturers. It was the industry’s first decline since early 2013.
Coupled with an economy growing at its slowest annual rate in 25 years and the recent crisis in China’s stock markets, the outlook appears bleak for an industry that has been a cash cow for mass market and premium car brands for the past five years.
“It will be quite challenging for carmakers because the market is cooling and the trend will not be reversed anytime soon,” says Teng Bingsheng, a professor at the Cheung Kong Graduate School of Business in Beijing.
Analysts at Barclays recently revised their 2015 outlook for passenger car sales growth sharply downward, from 8.5 per cent to 1.7 per cent.
Bernstein Research warned that “we’ll need a stronger word than ‘moderation’ to describe the industry’s challenges”.
Marques as diverse as BMW and Volkswagen have reported falling sales. VW experienced a 3.9 per cent fall in first-half group sales to 1.7m units — the first decline in nine years. BMW also caved in to dealer demands for bigger subsidies — a concession since made by others — while its Chinese joint venture partner issued a profit warning on July 13.
For VW, the pain is exacerbated by having just one mass-market SUV on offer in China at a time when the fast-growing segment accounts for one-third of all passenger car sales.
“That’s clearly been a huge miss on their part,” says Janet Lewis, analyst at Macquarie in Hong Kong. “A lot of first-time buyers are in central and western China where road quality is not as good and there’s more focus on the higher ride that you get with an SUV.”
The US automaker bolstered the view of analysts who say China’s car industry is simply maturing, with growth shifting to smaller cities in the country’s vast interior and increasingly driven by new model launches. The market is merely becoming more competitive with lower profit margins, more in line with those in the US and Europe.
“It’s easy to be pessimistic when you start to see some year-on-year developments that are negative,” says Bill Russo, a Shanghai-based consultant who notes that car sales also grew less than 5 per cent in China in 2011 and 2012. “But we went through a softening a few years back and I remember having similar conversations about whether this was the big down cycle. It wasn’t.”
“Supply has caught up to demand,” he adds. “[Companies] are going to be giving away some of those very good margins they have enjoyed for quite a long time.”
That may squeeze shareholder payouts too. VW, for example, has seen an almost eightfold increase in the annual dividend it receives from its China joint ventures over the past five years, from €400m in 2009 to €3bn last year
Mr Russo’s less gloomy big picture is also supported by basic demographics, with only 52 passenger vehicles per 1,000 people compared with a global average of 150.
Incomes are improving too. According to GaveKal Dragonomics, a Beijing consultancy, the annual income of some 15m Chinese households will exceed $20,500 this year for the first time. Another 19m households will break through the $13,500 level.
As a result, Macquarie has adjusted its 2015 China car sales forecast only moderately, projecting an increase of 10 per cent from 7 per cent previously, and thinks the overall market will grow from 19.7m units last year to at least 32m by 2020.
But as competition intensifies, the biggest rewards will flow to the most cost-efficient carmakers with the quickest model cycles — just as they do in other markets. “It’s harder to sell something that’s older in China, particularly if people know the next model is coming,” says Ms Lewis.
Chinese brands regain market share
July began as June ended for the likes of BMW and Volkswagen, according to analysts at Bernstein Research, with falling year-on-year sales for the two German groups as well as General Motors and Ford’s China joint ventures.
Unexpectedly, traditional laggards including Mercedes-Benz and Japan’s ‘big three’ automakers have been reclaiming market share.
Chinese brands have also seen their share of total sales — currently 41.5 per cent — start to grow again after four consecutive annual declines.
BAIC Motor, Daimler’s main China joint venture partner, is planning on a 29 per cent increase in sales of its own brand cars this year, to 400,000 units. “Our domestic brand business is growing substantially and has exceeded our expectations,” Xu Heyi, BAIC chairman, said last week.
In one sense, Chinese brands simply endured their “correction” a year early, after experiencing steep year-on-year declines in 2014. Like the Japanese companies, whose sales were affected by spats between Beijing and Tokyo in 2012 and 2013, they are improving from a low base.
Mercedes, meanwhile, is reaping the fruits of a restructuring begun two years ago by Hubertus Troska, the China head of its Daimler parent unit, as it begins to catch up with traditional leaders Audi and BMW. Mr Troska’s changes unified a fragmented sales and marketing structure, bringing together separate channels for imported and domestically produced vehicles.
On Thursday, Daimler reported better than expected second-quarter results with an underlying margin of 10.7 per cent. “Mercedes now looks to be the most profitable of the ‘big three’ German premium brands, something inconceivable a few years ago,” said Bernstein’s Max Warburton in a research note. “Daimler management . . . must feel vindicated and delighted.”
Mercedes is also benefiting from a series of new product launches at a time when refreshing the model line-up is becoming essential in the world’s largest car market.
Macquarie’s Ms Lewis says the German company is in “about the sixth inning” of a strong new product cycle in China, with new GLC SUV and E-class sedans in its pipeline.
“Products tend to have a very short life cycle in China,” adds Mr Russo. “If it didn’t launch in the past 18 months, it’s unlikely to be hot. You’ve got to rake it in while you can.”
Additional reporting by Wan Li