Tax cut for small models drives Chinese car sales

The Financial Times, November 11, 2015

Patti Waldmeir in Shanghai

Tax cut for small models drives Chinese car sales - FT.com Mail, Today at 11.13.18 AM

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

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China car market braced for abnormal era of flat sales

The Financial Times, July 27, 2015

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.03.00 PM

On the eve of China’s largest car show in April, executives and analysts braced themselves for a “new normal”: single-digit sales growth after two fat years. Yet some are beginning to wonder if the world’s largest car market is actually entering an abnormal era of flat or even falling sales.

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.”

GM, however, bucked the trend with a 2.6 per cent rise in first-half China sales, helping to send its shares up more than 4 per cent after it reported second-quarter earnings on Thursday.

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.

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.04.46 PM

“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

China car market braced for abnormal era of flat sales - FT.com Mail, Today at 6.06.25 PM

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

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Toyota Poised to Lose Global Sales Lead to VW on China

Bloomberg News, January 22, 2015

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(Bloomberg) — Toyota Motor Corp., which fended off Volkswagen AG to remain the world’s top automaker in 2014, may lose the sales crown as early as this year as it falls behind in China, the world’s biggest auto market.

Toyota is predicting its global deliveries will decline 1 percent in 2015 to 10.15 million vehicles, or just 10,000 units more than what Volkswagen sold worldwide last year. A new factory the German company is opening this year in Changsha, China, will add capacity for another 300,000 vehicles annually.

As Volkswagen and General Motors Co. add factories to bolster their already-dominant position in China, Toyota President Akio Toyoda’s strategy of foregoing new car plants until at least next year could result in the first shakeup in auto-sales leadership since 2011. Toyota ranks sixth among global automakers in China and sells less than one-third as many vehicles as its two main competitors in China.

“The difference is that Volkswagen has a jet engine strapped to its back called ’China’,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co. “Toyota, unfortunately, is in a position of weakness when it comes to the China market. It would be almost impossible to hold on to a number one position without being in the lead in China, and Toyota’s not even in that league.”

Worldwide sales for Toyota, including at its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed 3 percent to 10.23 million vehicles in 2014, according to a company statement. Volkswagen last week reported a 4.2 percent gain to 10.14 million vehicles, that included its two heavy-truck units. GM followed with sales of 9.92 million units, up 2.1 percent. Volkswagen and GM haven’t announced projections for this year.

China Capacity

Toyota, which hasn’t built an assembly plant in China since 2012 and faces a self-imposed moratorium on new factories until next year, will fall behind even further as Volkswagen and GM step up their expansion plans.

GM has announced plans to add five new plants in China by 2018 even though President Dan Ammann said the market is “maturing rapidly.”

Volkswagen expects to raise its China plant capacity to more than 4 million vehicles by 2018 from 3.1 million at end 2013, according to the company. Mainland China and Hong Kong accounted for a record 3.67 million deliveries at Volkswagen group last year, up 12.4 percent and extending the country’s lead as the German manufacturer’s largest single market.

Sales Target

By comparison, Toyota missed its sales projection for 1.1 million units in China in 2014, even as the Corolla and the Levin compact cars helped boost sales 13 percent to 1.03 million units. The company kept its China sales target unchanged for this year.

Even though Toyota may cede the sales leadership, it still outearns Volkswagen. Analysts estimate Toyota earned a profit of 1.96 trillion yen ($16.7 billion) last calendar year, compared with 10.7 billion euros ($12.4 billion) at Volkswagen.

“Their focus is not No. 1,” said Peggy Furusaka, a Tokyo-based auto-credit analyst at Moody’s Investors Service. “Toyota is more concerned about keeping profitability than chasing numbers. So for coming years, I wouldn’t be surprised to see Toyota selling fewer cars than Volkswagen.”

Toyota’s also-ran status in China is compounded by threats by its dealers to drop out of its network, citing poor sales and a lack of profit.

Dealer Threats

As many as 10 percent of dealers for one of Toyota’s China ventures could abandon the brand, according to the China Automobile Dealers Association. Among the 523 distributors in the FAW-Toyota Motor Sales Co. group, 95 percent are losing money, with some dealers stopping sales or shutting down altogether because of the losses, the state-backed dealer’s group said.

Vehicle sales growth slowed last year in China in tandem with the nation’s weakest economic growth since 1990. Deliveries are forecast to gain 8 percent to about 21.3 million passenger vehicles this year, according to the state-backed China Association of Automobile Manufacturers.

“As long as China is growing rapidly, Toyota will need to build new factories there,” said Yoshiaki Kawano, an analyst with IHS Automotive in Tokyo. “They are probably reserving some energy for growth in the longer term, as they are trying to improve the efficiency at their existing plants.”

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Ma Jie in Tokyo at jma124@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editors responsible for this story: Chua Kong Ho at kchua6@bloomberg.net Suresh Seshadri

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Foreign marques surge ahead in China car market

The Financial Times, January 13, 2015

by Tom Mitchell

Multinational carmakers defied slowing economic growth in China last year, increasing their lead over Chinese rivals in the world’s largest automotive market.

Sales of passenger cars, SUVs and minivans increased 9.9 per cent year-on-year to 19.7m units in 2014, the Chinese Association of Automobile Manufacturers said on Monday. That was significantly below the 16 per cent annual growth recorded in 2013, when 10 times more cars were sold in China than in India.

Overall vehicle sales, including buses and trucks, increased 6.9 per cent to 23.5m units. CAAM projected the market would grow 7 per cent this year, to more than 25m vehicles.

Chinese carmakers have blamed a broader slowdown in the world’s second-largest economy for their own poor sales performance last year. In October, the government reported its slowest quarterly economic growth figure — of 7.3 per cent — in more than five years.

Sales of Chinese passenger sedans fell more than 17 per cent last year, leaving domestic brands with a market share of just 22 per cent in the segment, compared with a 27 per cent share for German brands.

Dong Yang, CAAM secretary-general, said Chinese drivers did not appreciate the improvements made by domestic brands this year. “They improved their products and reduced their prices,” Mr Dong said. “But Chinese people care too much about [the cache of foreign] brands. I think this trend will continue in 2015.”

Dealers on the mainland for some of the world’s most best-known car companies, such as BMW, have also cited slowing economic growth in their successful negotiations for bigger rebates and more modest sales targets.

But some analysts argue that their complaints are overdone as the overall sales figures mask a large and growing discrepancy between local and foreign brands, with the latter continuing to enjoy double-digit annual sales growth.

“We’ve got a market that’s 24m units in size and is growing at 7 per cent — we should be celebrating not lamenting,” said Bill Russo, a Shanghai-based automotive analyst. “The issue is that most of the growth is captured by foreign manufacturers while local players are fighting at the bottom of the pyramid.”

“Five per cent growth anywhere else in the world is considered great,” he added. “But here we complain about anything less than double-digit growth. In a market this big, that’s crazy.”

Volkswagen reported at the weekend that its sales in China increased 12.4 per cent to 3.67m units, accounting for almost 40 per cent of its global total.

On Monday, Jaguar Land Rover of the UK said that it had recorded a 28 per cent annual surge in China, its largest market, compared with a 9 per cent increase in overall sales. Owned by India’s Tata Motors, JLR opened its first manufacturing facility in China in October as it races to catch up with VW unit Audi, BMW and Daimler’s Mercedes-Benz, which together account for about 80 per cent of premium vehicle sales in China.

The Chinese government forces overseas car companies to operate joint ventures if they want to manufacture locally. Most have linked with large state-owned auto groups, which reap a steady flow of dividends from the partnerships but have failed to develop strong brands of their own.

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