Industry panics, overcapacity spreads, but government brushes off the wailing and gnashing of teeth, looks to EVs.
New-vehicle sales in China plunged 13.9% in November, compared to a year ago, to 2.55 million units, the China Association of Automobile Manufacturers (CAAM) announced today. This was the fifth month in a row of year-over-year drops, and the steepest year-over-year drop since January 2012, which had been caused by the timing of the lunar new year. November brought sales for the first 11 months to 25.4 million new vehicles, a drop of 1.7% from a year ago.
December is historically the strongest month of the year, and the November plunge bodes ill for December. CAAM, which is backed by the Chinese government, has been ratcheting down its forecasts for year-total sales, to keep up with reality. On Tuesday, given the plunge in November, it lowered its sales forecast for 2018 to a drop of 3%.
To put this sales decline for the year 2018 into perspective: This is something that has simply not happened in modern China.
And it’s a total shock to the industry that has only known growth – and mostly at breakneck speeds. Data going back to 1990 show relentless annual sales increases, in many years by the double digits. Over the past 20 years, sales have boomed by a factor of 10. As sales stalled or fell in the US and other developed markets, China was moving from automotive backwater to the globe’s only automotive superpower.
In 2012, China became the largest auto market in the world, trouncing the US. In 2017, new-vehicle sales reached 28.9 million units. By comparison, in the US, new vehicle sales dropped to 17.2 million units, from the record of 17.6 million in 2016. China is not even playing in the same ballpark anymore.
Even during the Financial Crisis, as auto sales were collapsing in the US, China auto sales boomed, powered by massive government incentives. The auto industry has been a big priority for the government. The industry’s job was to turn the highways, bridges, and city streets that the government was massively building at blinding speed into parking lots, and it worked.
In this economy, sales simply could not slow because they weren’t allowed to. And the industry grew up in this steep-growth-forever environment. But now, sales have dropped year-over-year for the past five months – at an ever-sharper rate:
- July: -4.00%
- August: -3.8%
- September: -11.6%
- October: -11.7%
- November: -13.9%
There had been warnings. In 2017, new-vehicle sales had grown only 3%, cooling from the blistering growth of 13.7% in 2016, even though sales in both years had been propped up by a cut in the automobile sales tax on smaller cars. And at the beginning of 2018, the sales tax for these vehicles was allowed to revert to is normal level of 10%.
For months, the industry has been clamoring for more stimulus measures, such as a broad cut in the auto sales tax. But the Chinese government appears to have no appetite for them, in terms of gasoline-powered vehicles. All the stimulus focus is on EVs and plug-in hybrids.
The chorus from the government is that automakers have to adapt. It is unhealthy for the industry to depend on government assistance every time sales drop, explained CAAM deputy secretary-general Shi Jianhua. In a truly competitive market, good companies will prosper and bad companies “will be forced to adjust and upgrade,” he said.
“This can help us with the survival of the fittest and improve concentration in the industry,” he said.
At the briefing in Beijing today, CAAM assistant secretary general Xu Haidong put it this way: “We’re currently in a painful period, and this process is really tough.”
The weakness is among consumers, not businesses: Sales of passenger cars plunged 16% year-over-year in November, and are down 2.8% year-to-date. Business are holding up: Sales of commercial vehicles rose 2% in November and 5% for the first 11 months of the year.
Within this historic decline of new-vehicle sales is a booming sector: Sales of EVs and plug-in electric hybrid vehicle surged 37.6% in November compared to a year ago. Year-to-date, sales in this category have skyrocketed 68%, to 1.03 million vehicles, and at this growth rate are on track to reach the government’s target of 2 million sales by 2020. But the category is currently still only 4% of the market.
This is where the government is placing the incentives and subsidies, with some additional help from its muscular policies. For example, all foreign automakers in China must produce EVs in China starting next year.
China’s entire auto industry is built around the theme of endless rapid growth as a given. Numerous plants are being constructed to add capacity, even as overcapacity is already plaguing the industry, just as sales are declining for the first time in recent history. This is a perfect setup for a big shakeout. And the government’s refusal to jump in and save the sector one more time, indicates that it might actually allow that shakeout to happen.
A big shift, at a cost of $3.8 billion – which it now has to borrow. Read… After Wasting $14 billion on Share-Buybacks, GM Prepares for Carmageddon & Shift to EVs, Cuts Employees, Closes 8 Plants